FHA Streamline Refinance Pros and Cons
Key highlights of the FHA streamline refinance program include not requiring borrowers to verify their job, income, assets or credit score as well as no maximum loan-to-value (LTV) ratio or appraisal report requirement. Program considerations include stricter loan terms, the additional expense of mortgage insurance premium (MIP) and loan limits.
We review the full list of the pros and cons for an FHA streamline refinance below. Borrowers should evaluate both the positives and negatives of the FHA streamline refinance program to determine if it is right for them.
FHA Streamline Refinance Pros
Streamlined Application Requirements -- No Job, Income, Asset or Credit Score Verification
The FHA streamline program does not require borrowers to verify their employment, income, assets or credit score to qualify for the program. This significantly streamlines the refinance application process as borrowers are not required to submit pay stubs, tax documents, bank statements, employment verification or even a credit report to qualify for a FHA streamline refinance. Instead, lenders rely on borrowers' mortgage payment history to evaluate their ability to qualify for the loan. The FHA streamline refinance program is called "streamline" because of the significant documentation and time it eliminates from the mortgage process.
No Maximum Loan-to-Value (LTV) Ratio
The FHA streamline refinance program does not apply a maximum loan-to-value (LTV) ratio which makes it ideal for FHA borrowers who are underwater on their loan (mortgage amount is greater than the value of the property). Most mortgage programs apply a maximum LTV ratio of 97% which means your mortgage amount cannot exceed 97% of the fair market value of your home which makes it impossible for underwater borrowers to refinance, even if they can afford the new monthly mortgage payment. By eliminating the maximum LTV requirement, the FHA streamline program enables more borrowers to refinance their mortgage regardless of their property value.
Attractive Mortgage Rate
The mortgage rate on an FHA loan is typically 0.250% - 0.750% lower than the interest rate for most conventional loan programs. The interest rate for an FHA refinance is lower because the program is backed by the government and borrowers are required to pay an FHA mortgage insurance premium, which provide additional security for lenders in the event borrower cannot pay back the loan. The lower mortgage rate on an FHA loan reduces your monthly payment and potentially saves you thousands of dollars in total interest expense. The lower rate is especially helpful for borrowers with lower credit scores, who usually pay a higher interest rate on their mortgage. Because the FHA streamline refinance program does not require a credit report, borrowers with low credit scores still benefit from the lower FHA mortgage rate.
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No Appraisal Report
Because the FHA streamline refinance program does not use a maximum loan-to-value (LTV) ratio, borrowers are not required to obtain an appraisal report. Eliminating the appraisal report saves borrowers hundreds of dollars in closing costs and streamlines the closing timetable. For a standard refinance, obtaining an appraisal report can add several weeks to the schedule.
No Borrower Income Limit
The FHA streamline refinance program does not apply a limit to how much money borrowers earn. Several other refinance assistance programs use a maximum income limit to determine borrower eligibility. By not using a borrower income limit, the program enables more borrowers to refinance their mortgage.
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FHA Streamline Refinance Cons
Stricter Loan Terms
The FHA streamline refinance program imposes several restrictions on loan type, terms and amount. First, the mortgage you refinance must be an FHA loan. If you do not have an FHA mortgage you can still refinance your existing loan with an FHA loan but you cannot use the FHA streamline refinance program. Second, unless you are refinancing from an adjustable rate mortgage (ARM) into a fixed rate mortgage, your new loan must result in a lower monthly mortgage payment (this is referred to as a net tangible benefit according to FHA streamline program guidelines). Additionally, except for paying the upfront FHA mortgage insurance premium (MIP), your mortgage balance cannot increase which means you are required to pay for all other closing costs out of pocket or use a "no cost" mortgage, which usually means you pay a higher interest rate. Finally, cash out refinances are not permitted under FHA streamline program guidelines although borrowers are allowed to take-out $500 in proceeds from the loan.
FHA Mortgage Insurance Premium (MIP)
FHA streamline refinance program participants are required to pay an upfront and ongoing monthly FHA mortgage insurance premium (MIP), even though they paid MIP on their current loan. MIP pays for insurance that protects lenders in the event that borrowers default on their mortgage. The upfront fee increases your closing costs while the ongoing monthly fee increases your total monthly housing expense. The upfront FHA MIP for most mortgages is 1.75% of the loan amount while the ongoing fee depends on the loan amount, loan-to-value ratio and mortgage term. Borrowers are eligible to receive a partial refund of their previously paid upfront MIP if they refinance an existing FHA loan within three years. MIP is an extra cost that borrowers do not pay with standard mortgage programs although most mortgage programs require borrowers to pay monthly private mortgage insurance (PMI), which is similar to the ongoing FHA MIP, if the loan-to-value (LTV) ratio exceeds 80%.
Borrower Must Be Current on Mortgage
To qualify for the FHA streamline refinance program borrowers must be current on their mortgage and cannot have any missed or late mortgage payments within the three months prior to applying for the loan. In some cases, borrowers looking to refinance may be under financial hardship and struggling to make their monthly payments. These borrowers may not be eligible for the FHA streamline program due to a delinquent mortgage or late payments.
FHA Loan Limits
There are limits on the size of loan you can obtain through the FHA streamline refinance program. FHA loan limits vary by county and by the number of units in the property being mortgaged. In the contiguous U.S., loan limits for a single unit property such as a home or condominium range from $472,030 to $1,089,300 for high cost areas and the limit for a four unit property ranges from $907,900 to $2,095,200. In Alaska, Hawaii, Guam and the U.S. Virgin Islands loan limits range from $1,633,950 for a single unit property to $3,142,800 for a four unit property. Because you can only use the FHA streamline program to refinance an existing FHA loan, the loan limits should not be a limiting factor for most borrowers.
More FREEandCLEAR Resources
FHA Streamline Refinance Guide
Review our comprehensive overview of the FHA streamline refinance program including borrower qualification requirements, key loan terms and other important program information such as property eligibility and FHA loan limits.
FHA Mortgage Rates
FHA streamline refinances are provided by traditional lenders such as banks, mortgage banks, mortgage brokers and credit unions. Use our FHA mortgage rate table to review updated FHA mortgage rates and fees for lenders in your area. Even if your current lender offers FHA streamline refinances you are not obligated to work with that lender when you refinance and you should shop your mortgage business to find the loan with the best terms. Comparing rates from multiple lenders is the best way to save money on your mortgage.
Mortgage Refinance Assistance Programs
Review our comprehensive summary of government-backed and conventional mortgage refinance assistance programs. These programs are designed to help borrowers efficiently and cost-effectively refinance into more affordable and manageable mortgages.
FHA Mortgage Qualification Calculator
Use our FHA Mortgage Qualification Calculator to determine what size FHA loan you can afford based on your income and debt. The calculator also indicates the FHA loan limit in your county as well as the up-front and ongoing FHA mortgage insurance premium based on your mortgage amount and loan-to-value (LTV) ratio.
Sources
"Streamline Your FHA Mortgage." Federal Housing Administration. U.S. Department of Housing and Urban Development, 2020. Web.