Homeowners

What You Need to Know About FHA Streamline Refinances

Are you looking to lower the monthly payment on your FHA mortgage? A refinance could be the answer. And one of the nice things about Federal Housing Administration (FHA) loans is that they come with a relatively unique refinancing option, the FHA streamline refinance. 

These types of refinances are pared down and cost less than other refinancing options.

So, what makes this type of loan so different? Here’s what you need to know.

What is an FHA Streamline Refinance?

An FHA streamline refinance is a type of mortgage refinance specifically for FHA-backed loans. It’s simpler than other types of refinances, requiring fewer steps and verifications. According to the FHA, the loan is designed to provide a “net tangible benefit” to the borrower, meaning the borrower must benefit in some way from the new loan.

However, FHA streamline refinances have a few more stipulations on how you can refinance compared to other types of loans. For example, you typically can’t use an FHA streamline for a higher monthly payment or interest rate. 

Ralph DiBugnara, regional vice president with New American Funding, said this is because an FHA streamline refinance rarely requires an appraisal or an income or credit verification—something most banks or lenders require in typical refinances. 

But ensuring homeowners don’t end up with a higher monthly payment keeps the refinancing fairly low risk for the lender. It also helps to lower the cost for the borrower.

Pros of FHA Streamline Refinances

The fact that there is typically no need for an appraisal is one of the biggest benefits of an FHA streamline refinance. FHA streamline refinances base your new loan amount on how much you still owe on your mortgage, rather than how much your home is currently appraised for. 

This may make it an attractive option for homeowners whose mortgages are underwater (aka, the borrower owes more on the home than it is currently worth). 

Credit checks are not always required either on streamline refinances. This may help homeowners with lower scores.

“There are no minimum credit score requirements, as long as the mortgage holder has made at least six mortgage payments,” said DiBugnara. 

Depending upon the type of FHA refinance, your income may not need to be verified, either. 

This simpler refinancing process is what gives the FHA streamline refinance its name—it’s a refinance with fewer steps, less paperwork, and a faster closing time than other types of refinancing. 

Armine Arutunian, a loan consultant with New American Funding who is based in Downey, Calif., added that the “FHA streamline is great for those families who want to reduce their interest rate without taking cash out.”

FHA streamline refinances also allow borrowers to change the type of loan they have—they can convert their adjustable-rate mortgage to a fixed-rate mortgage and vice versa. 

Homeowners can also use an FHA refinance to lengthen the term of their loan by up to 12 years, lowering the monthly payment in return.

Cons of FHA Streamline Refinances

The uniqueness of an FHA streamline refinance comes with a few downsides, too. Homeowners typically can’t use an FHA streamline refinance to shorten their loan term unless it also decreases their monthly payment by $50 or more. 

This means that a borrower looking to reduce the amount of interest they pay over time by paying more in principal (the amount originally borrowed from the lender) each month wouldn’t be able to take advantage of an FHA streamline refinance. 

In addition, if you’re looking to get cash out of your equity by refinancing, FHA streamline refinances aren’t a great option. That’s because you can only get up to $500 cash back on an FHA streamline refinance. 

Consider a home equity line of credit or a cash-out refinance instead if you’re hoping to get some cash via refinancing. 

Streamline refinances also require you to continue paying mortgage insurance if your down payment was 10% or less. Down payments above this amount will still need to pay mortgage insurance for 11 years. 

And of course, FHA streamline refinances come with one major downside that “you will see in most refinances: There are still closing costs,” said DiBugnara. 

But he noted that these costs can be rolled into the equity or principal of the home, often in return for a higher mortgage rate.

Ralph DiBugnara NMLS # 19269

Armine Arutunian NMLs # 251075