FHA Mortgages offered through HUD are Government insured against default and therefore, because of the government cushion given to Lenders who make FHA loans, very attractive interest rates are available. Furthermore, just like for Veterans (VA Loans), FHA carries a special feature that’s not available for Borrowers who have loans backed by Fannie Mae or Freddie Mac (Conventional). This special feature is known as a STREAMLINE REFINANCE.
A Streamline refinance is called that because unlike the rigorous, almost intrusive underwriting process Borrowers are subjected to when they purchase a home, a Streamline refinance is much more streamlined. . . truly no income or asset verification , and no credit underwriting except for a close look at the payment history on the FHA mortgage being refinanced.
As recent as February 2011, HUD (which oversees FHA) announced a less stringent underwriting requirement for Streamlines to the point where even borrowers who are presently unemployed or working part time can be approved.
The thinking here is to foster the probability that the FHA insured mortgage will continue to be paid on time by the Borrower, and to do whatever possible to make that happen. Naturally, if a mortgage is being paid on time already, and the monthly payment was lowered, easing the burden on that Borrower will only enhance the chances of continued timeliness.
So what are the ‘Essential Requirements’ ?
(1) A Clean 12-month Payment History on the FHA Mortgage Being refinanced
Borrowers who’ve experienced a rocky road in keeping their payments on time thus far, are still likely to have problems despite a lowering of their payment. Such borrowers often find a way, sadly, to take their newfound savings and funnel it to something not financially wholesome. Bad habits die hard.
A clean mortgage history however is indicative that future payments will be made on time, especially if the payments are lowered.
(2) 210-Day Waiting Period/Cooling-off period between refinances
If the FHA mortgage being paid off is a new one, 6 mortgage payments must have been made before that mortgage is eligible for payoff via a FHA Streamline. Furthermore, 210 days must have passed since the most recent refinance.
(3) Job and Income – Not Verified
Although Lenders who make FHA loans may have an overlay to the true HUD guidelines, an FHA streamline can be done without any verification of the Borrower’s employment or income. The other factors must be in place, but even an unemployed Borrower can be eligible to lower their payments.
(4) Minimum Credit Score Requirement – Void
FHA by rule doesn’t look at FICO scores and never has. It’s Lenders who make FHA loans who impose such minimum standards. However a true Streamline doesn’t look at a Borrower’s credit score. Only the mortgage payment history on the loan being paid off is considered.
(5) Benefit To Borrower
The concept of ‘Net Tangible Benefit’ (NTB) was recently introduced by HUD to govern FHA Streamline Refinances. The essential component of the NTB is to make sure the Borrower’s monthly P&I + MI amounts are being reduced by at least 5%. Lowering the overall monthly obligation because the property taxes were reassessed is therefore not an acceptable purpose or reason. Having said this, refinancing a Borrower who is in an FHA Adjustable Rate Mortgage, into a Fixed rate FHA loan is always an acceptable ‘TNB’.
(6) Limit To Increase in Loan Amount
The loan amount cannot be raised beyond the present principal balance to cover closing costs. The new Loan balance is limited by the math formula of Present Loan Balance + Upfront Mortgage Insurance Premium). The standard lender fees, escrow/title fees, impounds of tax/insurance etc must be either paid by Borrower using cash at the closing or absorbed by lender credit.
(7) Appraisal is Not Required
Upside down homes are still eligible for FHA Streamlines because a new Appraisal is not required. HUD has already become committed to insuring the loan, so a change in value in either direction does not affect the eligibility of the borrower to lower their payments.
(8) New Mortgage Insurance offset by Old Mortgage Insurance Already Paid In
All FHA loans carry mortgage insurance both as a one-time upfront amount funded at closing and then an ongoing monthly amount based on the loan amount.
However within the first 36 months since obtaining the FHA loan that’s being paid off/refinanced, the borrower can secure a refund for a portion of the amount paid. The longer the loan has been held, the lower the amount of the refund. The chart below actually indicates the approx. amounts .
For example, refinancing in month# 20 would mean an approx. 45% refund of the original Upfront Mortgage Insurance amount paid. This refund amount isn’t given back as cash, but instead applied as a credit towards the overall cost of getting a new Upfront Mortgage insurance. See below for a useful Chart on FHA Mortgage Insurance refunds applicable for Streamlines
Remember that once a Borrower has paid on their FHA mortgage for 5 years (i.e. 60 months) the Mortgage Insurance can be removed.
Charles Vamadeva, TheZeroDownLoan.com