Q: I've got an FHA-backed loan on my home. I heard that the FHA allows for a Streamline Refinance where I don't have to provide any documents and the house doesn't even need to be appraised. That seems too good to be true. Is it?
A: FHA Streamline Refinancing is real, and so are the benefits, but it's not quite as simple as you describe. Of course, before you even consider looking into a streamline refinance, the first question that needs to be answered is "Is it worth it for me to refinance?" That has a lot to do with how long you plan on staying in your home, what a refinance will cost and when (or if) you'll start to save money by refinancing. Using HSH's Should I Refinance? Calculator can help answer that question for you. If refinancing is right for your situation, an FHA Streamline Refinance might be a great avenue to achieve savings.
Benefits of an FHA Streamline Refinance
HUD regulations require that a Streamline Refinance result in what they call a "net tangible benefit" to the borrower. In general, this means the borrower must receive a lower or more stable monthly mortgage payment. To determine a if the refinance produces a net tangible benefit, a comparison between the old and new loan is made, and these comparisons differ depending on the borrower's choice of loan type and the term of the new loan.
The lender will review the existing loan to determine its "combined rate"; this is the sum of the loan's interest rate plus the annual MIP rate the loan currently carries. For example, if the loan's rate is 5% and the annual MIP is 0.55%, the combined rate is 5.55%.
Re-extending the loan term
Then, if the streamline refinance will re-extend the loan term (or won't shorten it by more than three years), the combined rate comparison is such:
For a fixed-rate to fixed-rate refinance, the new combined rate must be at least 0.5 percentage points below the existing combined rate, or
For a fixed-rate to a one-year ARM refinance, the new combined rate must be at least 2 percentage points below the prior combined rate, or
For a fixed-rate to 3-, 5-, 7- or 10-year hybrid ARM refinance, the new combined rate must be at least 2 percentage points below the prior combined rate.
There are different comparisons if a borrower wants to move from an ARM to a new fixed rate. The FHA considers a switch from an ARM to a fixed-rate product to be a more stable and less risky choice and allows a borrower to refinance to a new fixed rate even if the new loan's interest rate is up to two percentage points higher than the existing loan's rate. Of course, it seems unlikely that a borrower would want to refinance and have their interest rate and payment increase, even if it is more predictable over time.
Other combined rate comparisons are used for ARM-to-ARM transactions, but in those instances the new combined rate must be at least 1 percentage point lower.
Shortening the remaining loan term
Borrowers can also use an FHA Streamline Refinance transaction to shorten the remaining term of the loan. If the streamline refinance will cut three years or more off of the remaining loan term, a different set of combined-rate comparisons apply. They are:
For a fixed-rate to fixed-rate refinance, the new combined rate must simply be below the existing combined rate, or
For an existing one-year ARM to a new fixed-rate refinance, the new combined rate cannot be more than 2 percentage points higher than the prior combined rate, or
For a 3-, 5-, 7- or 10-year hybrid ARM to fixed-rate refinance, the new combined rate cannot be more than 2 percentage points higher than the prior combined rate.
In term-shortening streamline refinance transactions, only fixed-rate to fixed-rate or ARM-to-fixed-rate refinances are allowed. That's because the FHA does not insure ARMs with less than 30 year repayment periods, so the term cannot be shortened by moving to a new ARM.
Regardless, and as above, it seems unlikely that a borrower would want to refinance to a new loan and have their payment increase -- e.g. from a lower-rate ARM to a higher fixed rate -- even if their payment would be more predictable over time, so the first option is probably the more likely scenario.
Types of FHA Streamline Refinances
After having determined whether there is a tangible net benefit to the borrower, the next step is determining what kind streamline refinance the borrower may be eligible for.
There are two types of FHA Streamline Refinance procedures. These are called "Non-credit qualifying" and "Credit qualifying".
Non-credit qualifying
In a non-credit qualifying streamline refinance transaction, your home isn't subject to an appraisal and there is no income, credit score or employment verification. In essence, all you're doing is swapping in a new interest rate, resetting the loan term and applying any new mortgage insurance premium (MIP) structure onto the loan.
A borrower is eligible for a non-credit qualifying Streamline Refinance transaction if all borrowers on the existing mortgage will remain as borrowers on the new mortgage.
This doesn't mean changes to the names on the loan can't happen, though. FHA allows a borrower to be removed from the property title and new mortgage in a non-credit qualifying streamline refinance in cases of divorce, legal separation or the death of a borrower. The divorce or separation agreement must indicate that the remaining borrower has been awarded title to the property and responsibility for the mortgage and can demonstrate that they have made at least six monthly payments on the existing loan.
Credit qualifying A credit qualifying streamline refinance may be required if the borrower is changing the term of the loan and this results in an increase in monthly payment by 20% or more, but may also be required in cases where the borrower is removing a co-borrower from the loan. This might for example be a case where a parent was a co-borrower to help a child purchase a home but that support is no longer needed. There is still no appraisal of the home required, but the lender will do a credit check and debt-to-income calculation to make certain the remaining borrower(s) can safely afford the mortgage.
More FHA Streamline Refinance qualifications
In addition to the above, there are other qualifications which must be met to be eligible for an FHA Streamline Refinance:
- The loan must be current. You have to have made at least the last six months of payments on time for all mortgages against the property at the time of the refinance
- Almost no late payments. You can have no more than one 30-day late payment on any mortgage against the property in the in the last year, and none in the last six months
- There's a waiting period. You'll need to wait at least six months since your current mortgage was originated to invoke a streamline refinance
- No cash-out refinances. You can't draw out any equity to cover loan costs, so you'll need to pay those out of pocket
- Tangible benefit to the borrower: The streamline refinance must reduce your combined interest rate or meet the net tangible benefit tests described above
FHA mortgage insurance premiums
June 1, 2009 is an important date when it comes to determining the cost of FHA insurance premiums for an FHA-to-FHA refinance transaction. Mortgage insurance costs differ for loans endorsed before and after that date.
If your original FHA loan was originated before June 1, 2009, your up-front mortgage insurance premium (UFMIP) in a streamline refi transaction is just 0.01%. In a streamlined refinance of a loan that old, you'll have a recurring mortgage insurance premium (MIP) of 0.55% of the loan amount. If the new loan starts with a loan-to-value ratio of 90% or lower, you'll be able to cancel the MI on the loan after payments are made for 11 years.
If your original loan was originated after June 1, 2009, you'll need to pay a UFMIP of 1.75%, and your recurring MI premium will depend on your loan amount, LTV ratio and choice of new mortgage term. This can range from a premium cost of as little as 0.15% of the loan amount for a refinance to a new term of less than 15 years where the loan has a lower than 90% LTV ratio to as much as 0.75% of the loan amount each year for a loan with a higher-than 95% LTV and a loan amount in excess of current standard conforming loan limits.
Of course, if the new loan starts with a loan-to-value ratio of 90% or lower, you'll be able to cancel the MI on the loan after payments are made for 11 years.
Be aware that FHA can change premium costs at any time. FHA MIP premiums were last lowered in early 2023.
FHA mortgage rates
FHA mortgage rates have been substantially lower than conventional mortgage rates in recent years, adding to the list of the program's benefits. However, depending on when you took out your existing loan, it may or may not possible to improve your combined interest rate. When you can, you'll generally need at least a half-point difference between the existing loan's rate and a new rate to take advantage of an FHA Streamline Refinance.
Is an FHA refinance worth it?
As with any refinance, you'll need to run the numbers. Since it will cost you money to refinance, you'll need to determine the difference between the payments on your existing loan and the new loan, and divide this into the expected amount of your closing costs (check your existing HUD-1 Settlement Statement or Closing Disclosure for the best estimate). This will determine your break-even point (the date when you have recovered your outlays and will begin to actually save some money as a result of your refinance).
Issue: Closing Costs
One other thing to keep in mind about an FHA Streamline Refinance is while it may be faster, simpler, and cost less, it's not as though a refinance will be free. There will still be at least some closing costs you'll need to pay, and since you can't draw equity out of your home to pay them, those costs will need to be paid out of pocket. While it may be possible to have costs traded off into a slightly higher than market interest rate (sometimes called a "no cost" refi), this may reduce the benefit of the refinance or even cause it to fail the "net tangible benefit" test described above.
If a no-out-of-pocket-costs offer still meets the net tangible benefit test, a streamline refinance will save you money starting from the first payment. However, the higher-than-market interest rate means your monthly savings will be smaller, and your total savings less than if your loan had a lower rate. As well, and depending on how far along you are in your existing loan, the total interest costs over the life of the loan could actually be more than if you hadn't refinanced in the first place.
If there are closing costs and you are looking at a fairly short forward time frame (say, 3 to 4 years) you might be able to get back to breakeven. However, if all you will do is get back to zero in the end, there's little reason to bother with all the time and expense of the refinance transaction, but it's always worth the opportunity to review if you can save money on your mortgage. Even if there are no costs to recoup, you'll need to weigh the effort of refinancing against the total cumulative savings you expect to achieve.
One additional point worth considering is that there is no limit on the number of FHA streamline refinances you can do, provided they meet the net tangible benefit test. This means you may be able to take advantage of falling rates as they trend back down after hitting 22-year highs in 2023. As rates decline, you could turn a 7% rate into a 6.5% rate, then 6%, 5.5%, etc., provided the savings from doing so will offset the costs.
One last piece of advice: Many lenders will do a FHA streamline refinance, but lenders each have their own rules and overlays, so it’s always best to shop around.
(Image: KLH49/iStock)
