How Does a FHA Streamline Refinance Work?

An FHA streamline refinance is a reduced cost, reduced paperwork loan program available to anything that currently has a FHA loan.

If you’ve ever refinanced your mortgage, you know that it can sometimes be an expensive and sometimes cumbersome process.

By the time you pay lender, title, escrow and appraisal fees, the costs can really add up.

A streamline refinance is a special type of refinance only available to homeowners that currently have a FHA or VA home loan.

Both FHA and VA home loans have a built in benefit of allowing you to reduce your interest rate without having to go through the expense and paperwork of the entire home loan process again.

While the general idea of being able to reduce your rate and payments on a VA loan is similar to FHA, there are enough differences when it comes to qualifying and processing that we will cover VA streamline refinances in another article.

FHA Streamline Qualifying Guidelines

• Borrower must realize a minimum .5% reduction in interest rate – This is called Net Tangible Benefit.
• There must be a minimum of 6 payments made on “new” FHA mortgages before being eligible for refinance.
• There may be a minimum credit score requirement – my company will go down to 580
• You must be employed – Income verification is not required.
• Your loan amount cannot increase more than the amount of the new Up Front Mortgage Insurance.
• Refinance can only reduce rate or term, cash out is not allowed.
• Appraisal not required under most circumstances.
• Single families and Duplexes allowed.
• Owner occupied and non-owner occupied properties allowed.

Documentation for a FHA Streamline Refinance

Reduced documentation is a big benefit when processing a FHA streamline refinance.  Your ability to qualify is based on you making on time payments, and being able to show a .5% reduction in payments.

For this reason, the documents needed by the lender are really pretty simple:

• Current pay stub*
• Current mortgage statement
• Current HOA payment statement
• Homeowners insurance declaration page

*Your lender only needs to verify that you are employed, your actual income is not verified.  A verification of employment will be ordered by the lender, without asking for you income documentation.

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Closing Costs Associated with a FHA Streamline

There are still costs associated with a FHA streamline refinance, and in most cases they tend to be less than a normal refinance.  How these costs are handled will depend on how your lender structures the loan.

Normal costs associated with a FHA Streamline include

• Lender processing fee
• Title and Escrow fee
• Upfront mortgage insurance fee (financed through loan)
• Setting up new Impound Account

While it is not exactly a “fee” a new impound account will need to be established to pay taxes and insurance on the new loan when they are due.  Depending on the time of year, and when your taxes and insurance are next due, the amount of money needed for the impound account will vary.

Once your FHA streamline refinance is completed, you will receive a refund check from your previous impound account for the balance of what was in there.  This amount should coincide with the amount that had to invest into the new impound account, making you just about “even” in the end.

Out of Pocket Costs

One of the most common out of pocket costs when doing a refinance is the appraisal.  Because there is no appraisal required with an FHA streamline refinance, this cost is typically eliminated.

There are some cases, like if you are changing who is on title, or who is on the loan, that an appraisal or full underwriting process might be required.  You will want to check with your lender if there will be any changes on the mortgage or on title.

The short answer to the “out of pocket costs” question is usually “Yes”, but it typically is only a matter of bringing in your next monthly payment to escrow at the close of the loan.

The most common way to structure a streamline refinance is for the lender to generate a credit through the interest rate you receive, and using that to offset your title, escrow and as much of your impound account as possible.  Bringing in your next month’s payment will usually cover any remaining costs involved.

When structured correctly, you should only have to make your next mortgage payment to escrow, and then weeks later, you will receive a refund from your old impound account that will in most cases, meet or exceed the amount of the the payment you brought in to escrow at the close of the streamline refinance.

Streamline Refinance Process Timeline

FHA streamline refinances typically do not take as long as a normal refinance due mostly to the fact that the process and paperwork is greatly reduced.

By not having to go through a normal underwriting process, not having an appraisal, and not having to provide the lender with a bunch of paperwork, the time to process a FHA streamline refinance is greatly reduced.

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The great thing about this program is that you are not eligible for a streamline refinance unless you are able to benefit from it financially!

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If you have any questions about whether or not this is a good option for you, either leave a comment or question below and I’ll get back to you quickly.