Money Management

What Is an FHA Streamline Refinance Loan – Program Guidelines

If you’ve got an present FHA mortgage, you might qualify for a particular kind of refinancing product generally known as an FHA streamline refinance. Although it’s essential to do your due diligence and punctiliously think about different refinance choices — in addition to the choice to do nothing — householders who refinance via this program are sometimes in a position to scale back their complete month-to-month funds by 5% or extra.

An FHA streamline refinance isn’t for each home-owner carrying an present FHA mortgage. Here’s a more in-depth take a look at the main points of the FHA streamline refinance program, potential charges and bills, eligibility necessities, and total suitability.

FHA Streamline Refinance — Characteristics and Benefits

FHA streamline refinancing is typically referred to as “FHA-to-FHA refinancing” to differentiate it from non-FHA refinancing merchandise.

FHA streamline refinancing bears some resemblance to VA streamline refinancing, also called IRRRL. However, VA streamline refinancing is simply accessible to eligible navy service members and their fast households, whereas FHA streamline refinancing is accessible to most owners with present, nondelinquent FHA loans.

According to the U.S. Department of Housing and Urban Development (HUD), all FHA streamline refinances should meet sure qualifying standards:

  • The house loan (present mortgage) to be refinanced should already be FHA insured. Conventional loans and different non-FHA mortgage loans, together with VA loans, aren’t eligible.
  • The borrower have to be present on the present loan’s funds.
  • The refinance should end in a “net tangible benefit” to the borrower, outlined broadly as leaving the borrower in a greater monetary position than the present FHA house loan does.
  • Borrowers can take out not more than $500 money on the refinanced loan, not together with refunds of any unused escrow balances on the present loan. Borrowers who want to take out extra cash should go for an FHA cash-out refinance, a distinct loan kind that’s not eligible for the streamline course of.
  • The loan quantity can’t be elevated to incorporate, or “wrap,” closing prices, the only exception being upfront mortgage insurance coverage premiums (UFMIP).

1. No Appraisal Required

One of the largest advantages of an FHA streamline refinance is the shortage of an appraisal requirement. Under most circumstances, debtors don’t must fee a brand new house appraisal throughout an FHA-to-FHA refinance. This reduces closing prices by wherever from $200 to $500, relying on the price of the lender’s appraisal.

2. Credit Qualifying vs. Non-Credit Qualifying Streamline Refinance

FHA streamline refinance loans are available two varieties: credit score qualifying and non-credit qualifying.

A non-credit qualifying loan makes use of the present loan’s qualification data to underwrite the refinance loan, eliminating the necessity for the borrower to resubmit detailed data for revenue, asset, and employment verification.

A credit score qualifying loan requires a brand new credit score examine: a “hard pull” whereby the lender obtains the borrower’s credit score report. It can also necessitate a reevaluation of the borrower’s revenue (revenue verification), debt-to-income ratio, and different underwriting {qualifications}. These necessities might lengthen the closing course of and make extra work for debtors, and will quickly impression debtors’ credit score scores as properly.

In each circumstances, at the least one borrower from the earlier mortgage should stay on the brand new loan. Per present FHA coverage, a non-credit qualifying mortgage refinance is permitted solely when all debtors from the earlier mortgage stay on the brand new loan, until the earlier mortgage has been assumed or a number of unique debtors could also be legally faraway from the title and new loan by loss of life, divorce, or authorized separation.

Borrowers could also be added to credit score and non-credit qualifying mortgages.

3. Origination Exemptions

The “streamlined” nature of FHA streamline refinancing is due partially to the expediency of the origination course of. In addition to waiving the appraisal requirement, FHA streamline refinancing exempts sure different steps required in buy loans and a few non-FHA refinance loans. These embody:

  • Checking borrower ineligibility on account of delinquent non-tax debt
  • Checking borrower ineligibility on account of delinquent federal tax debt
  • Applying property eligibility and acceptability standards
  • Applying National Housing Act statutory limits
  • Applying nationwide mortgage limits
  • Loan-to-value (LTV) limitations primarily based on the borrower’s credit score rating
  • Property underwriting
  • Borrower underwriting utilizing the TOTAL mortgage scorecard

In addition, non-credit qualifying FHA streamline refinance loans waive sure guide underwriting steps usually required of mortgage lenders.

4. Eligible Property Types and LTV Limits

Individual householders are eligible for FHA streamline refinance loans on owner-occupied main residences, qualifying second properties, and sure non-owner-occupied funding properties.

The most LTV ratio on most FHA refinance loans is 97.75% for main residences, which is far increased than the 80% restrict on commonplace FHA refinance loans. Also, FHA streamline refinance requires a most mortgage quantity, or “maximum base loan,” calculation. For most base loan calculation functions, main and secondary residences are thought of individually from funding properties.

Primary and Secondary Residences

The most base loan for these is the lesser of 1) the excellent principal stability of the present mortgage as of the earlier month, plus curiosity and any mortgage insurance coverage premium (MIP) due on the present mortgage, or 2) the overall principal stability of the present mortgage, together with financed upfront mortgage insurance coverage premium (UFMIP).

Any refund of UFMIP have to be subtracted from the loan quantity.

Investment Properties

The most base loan quantity is the lesser of 1) the excellent principal stability of the present mortgage as of the earlier month, or 2) the unique principal stability of the present mortgage together with financed UFMIP.

Again, any UFMIP refund have to be subtracted to finish the calculation.

5. Upfront Mortgage Insurance Premium (UFMIP) Refund

Homeowners who full FHA streamline refinance origination lower than three years after closing on their earlier mortgage could also be eligible for a partial refund of UFMIP.

The refundable portion of UFMIP ranges from 80% at one month after the earlier loan’s closing to 10% at 36 months after the earlier loan’s closing, declining by two proportion factors every month. For occasion, at month 14, the UFMIP refund quantity is 54%; at month 16, the UFMIP refund quantity is 50%.

For sensible functions, the utmost UFMIP refund is 68%, since debtors don’t qualify for FHA streamline refinance earlier than six months have handed from the unique cut-off date.

Borrower Eligibility and Requirements

FHA-to-FHA refinance loans include three key borrower eligibility and qualification necessities.

1. Mortgage Seasoning

The time period “seasoning” refers back to the age of the unique mortgage loan. Per HUD coverage, all the next seasoning situations should apply for an FHA mortgage loan to be deemed eligible for FHA-to-FHA refinance:

  1. At least 210 days (seven months) have handed from the cut-off date of the unique mortgage loan.
  2. The borrower has made at the least six funds on the unique mortgage loan.
  3. At least six full months have handed from the primary fee due date on the unique mortgage loan, regardless of the variety of funds made.
  4. On assumed mortgages solely, the borrower has made at the least six funds since assuming the loan.

All time frames are retroactive from the date of the task of an FHA case quantity, which happens early within the FHA streamline refinance course of.

2. Mortgage Payment History

For each credit score and non-credit qualifying mortgages, the borrower should have six consecutive months of on-time fee historical past on the earlier loan, retroactive from the date of the FHA case quantity task.

An on-time fee is outlined as a fee made in full throughout the month through which the fee is due. During the prior year, the borrower might haven’t any a couple of late fee late by 30 days or extra.

For instance, a borrower might qualify for an FHA streamline refinance if their solely late fee within the prior year occurred 9 months earlier than the date of the FHA case quantity task. However, they’d be disqualified if their solely late fee within the prior year occurred three months previous to the case quantity task date.

3. Net Tangible Benefit

The most complicated FHA-to-FHA refinance requirement is the so-called “net tangible benefit” check.

HUD defines “net tangible benefit” as a change that reduces the mortgage’s mixed rate or loan time period, or adjustments an adjustable rate mortgage (ARM) to a fixed-rate mortgage, such that the mortgage-holder receives a web monetary profit. “Combined rate” refers back to the sum of the curiosity rate on the mortgage plus the MIP rate.

The web tangible profit check applies to sure frequent FHA-to-FHA refinance conditions:

  • Refinancing a Fixed-Rate Mortgage to a New Fixed-Rate Mortgage. The new mixed rate have to be at the least 0.5 proportion factors (50 foundation factors) under the earlier mixed rate.
  • Refinancing a Fixed-Rate Mortgage to an Adjustable-Rate Mortgage (ARM). For each new one-year and hybrid ARMs, the brand new preliminary mixed rate have to be at the least 2 proportion factors (200 foundation factors) under the earlier mixed rate.
  • Refinancing an ARM With Less Than 15 Months to the Next Payment Change Date to a New Fixed-Rate Mortgage. The new mixed rate have to be not more than 2 proportion factors (200 foundation factors) above the earlier mixed rate.
  • Refinancing an ARM With Less Than 15 Months to the Next Payment Change Date to a New ARM. For each new one-year and hybrid ARMs, the brand new preliminary mixed rate have to be at the least 1 proportion level (100 foundation factors) under the earlier mixed rate.
  • Refinancing an ARM With More Than 15 Months to the Next Payment Change Date to a New Fixed-Rate Mortgage. The new mixed rate have to be not more than 2 proportion factors (200 foundation factors) above the earlier mixed rate.
  • Refinancing an ARM With More Than 15 Months to the Next Payment Change Date to a New ARM. For new one-year ARMs, the brand new preliminary mixed rate have to be at the least 2 proportion factors (200 foundation factors) under the earlier mixed rate. For new hybrid ARMs, the brand new preliminary mixed rate have to be at the least 1 proportion level (100 foundation factors) under the earlier mixed rate.

Additionally, when an FHA-to-FHA refinance ends in a discount of the mortgage time period, the web tangible profit check is met if the next three situations apply:

  • The present mortgage’s remaining amortization interval is lowered.
  • The new curiosity rate is the same as or lower than the unique curiosity rate.
  • The mixed month-to-month fee — principal, curiosity, and MIP — on the brand new mortgage exceeds the mixed month-to-month fee on the previous mortgage by not more than $50.

FHA Streamline Refinance Fees

FHA streamline refinance loans have comparatively gentle paperwork and underwriting necessities, however that doesn’t imply they’re fully freed from borrower-borne prices.

1. Mortgage Insurance

Like FHA buy loans, FHA streamline refinance loans require mortgage insurance coverage premiums (MIP). Like non-public mortgage insurance coverage, FHA mortgage insurance coverage protects the lender — and, finally, the FHA — from borrower default.

Per  HUD, FHA streamline refinance debtors are accountable for two separate MIPs:

UFMIP

For loans used to refinance a earlier FHA-endorsed mortgage issued on or earlier than May 31, 2009, the upfront mortgage insurance coverage premium is 0.01% of the bottom loan quantity. For all different loans, UFMIP is 1.75% of the bottom loan quantity. UFMIP is the one closing value eligible to be wrapped into an FHA streamline refinance loan.

Annual MIP

Depending on the preliminary LTV, annual MIP is as follows:

  • Mortgages With Terms Longer Than 15 Years and Base Loan Amounts Less Than or Equal to $625,000: 0.8% to 0.85%
  • Mortgages With Terms Longer Than 15 Years and Base Loan Amounts Above $625,000: 1% to 1.10%
  • Mortgages With Terms Less Than or Equal to fifteen Years and Base Loan Amounts Less Than or Equal to $625,000: 0.45% to 0.7%
  • Mortgages With Terms Less Than or Equal to fifteen Years and Base Loan Amounts Greater Than $625,000: 0.45% to 0.95%

In all circumstances, loans with preliminary LTVs beneath 90% require annual MIP for the primary 11 years of the time period. Loans with increased preliminary LTVs require annual MIP for the total time period.

2. Origination Fee

The origination price is a catch-all expense into which the lender might bundle collectively a number of discrete charges, corresponding to escrow and doc charges. If you don’t obtain an itemized accounting of your loan’s origination price, you might be entitled to ask your lender for one. Origination charges range broadly by lender and property worth, however typically don’t exceed 1% of the bottom loan quantity.

3. Processing and Underwriting Fees

These clerical charges are typically decrease on FHA streamline refinance loans than on buy loans and commonplace refinance loans. However, they’ll range broadly by lender. Expect an common mixed value of about $1,000.

4. Title Insurance

The goal of title insurance coverage is to guard the home-owner’s curiosity within the insured property and cover the price of fixing any title defects. Title insurance coverage is among the many greatest closing prices; $1,000 is an affordable common, though coverage prices range by issuer, jurisdiction, and the complexity of the title search course of. The underlying worth of the insured property has little bearing on title insurance coverage prices.

5. Prepaid Property Taxes

Before closing, FHA streamline refinance debtors could also be required to prepay property taxes for the next six-month interval. This one-time fee is separate from the tax portion of the borrower’s month-to-month escrow funds, which start after closing.

Depending on native tax charges and the underlying worth of the property, the one-time tax fee can vary from a low three-figure sum to a number of thousand {dollars}.

6. Prepaid Hazard Insurance

FHA streamline refinance debtors could also be required to prepay the next year’s hazard insurance coverage or householders insurance coverage premiums. Hazard insurance coverage prices range broadly relying on the underlying worth of the property and its age, situation, contents, and threat profile. In many circumstances, hazard insurance coverage premiums are paid outdoors of closing.

7. Recording Fee

This price covers the price of recording the transaction with the suitable metropolis or county authorities. Costs range by jurisdiction however typically are available under $250.

8. Other Fees

This will not be an exhaustive checklist of potential charges related to FHA streamline refinancing. Depending on your private home’s location and scenario, you might be required to pay comparatively minor charges corresponding to flood certification, which typically involves lower than $30. You can also be required to pay extra ongoing charges, corresponding to flood insurance coverage premiums.

On the brilliant facet, your FHA streamline refinance lender is not going to require you to pay for sure companies related to buy loans, corresponding to a house inspection.

Final Word

My spouse and I had been lucky to get a really favorable mortgage rate once we bought an older house just a few years again. After we purchased, charges rose steadily, pressuring potential homebuyers already feeling the squeeze from quickly rising house costs in lots of markets. With decrease rates of interest elusive, demand for refinancing dried up.

Now that mortgage charges are again close to historic lows and will stay down for a while, many owners who purchased after us want to reap the benefits of low rates of interest by refinancing their mortgages.

We would possibly discover ourselves amongst them in the end. After all, we’re only a handful of years into our 30-year mounted time period, so there’s loads of time for prevailing charges to fall under our unique benchmark and for a refinanced house loan to make monetary and sensible sense.

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