The FHA home loan is a popular choice especially so for first time home buyers. Why is that? FHA loans require just 3.5 percent down while still offering competitive mortgage rates. The FHA program isn’t limited to first-timers, but many who buy their first home do find the FHA program more attractive to their bank accounts. FHA is in the class of “government guaranteed” mortgages, which means the FHA lender is compensated for any loss due to a default and one of the reasons lenders like to make them. FHA loans are easier to qualify for compared to other low down payment programs.
Beyond these benefits, FHA loans have a feature that conventional mortgages do not: a streamline refinance. An FHA streamline is so-called because the refinancing process requires much less documentation compared to the evaluation needed to approve an FHA loan for a purchase.
FHA streamline loans do not require an appraisal. That means borrowers with FHA loans who know their mortgage balance is greater than the current value can still refinance to a lower rate as the appraisal requirement is waived entirely.
This is a fantastic benefit yet borrowers who are currently “upside down” with their FHA mortgage may not be aware of this special FHA streamline program and make no effort to reduce their monthly payments. In places that took the hardest equity hit over the past several years during the housing debacle if the borrowers have an FHA loan they can still lower their payments.
Limited Income Documentation
This is where the FHA streamline loan program really shines. With the FHA streamline, there is no employment verification needed. That means no income tax returns, no pay check stubs or W2 forms to be submitted. Nor will the FHA lender contact your employer to verify employment. While these are official FHA rules, some lenders will request a paystub to prove you are currently working.
Technically there is no credit check required with an FHA streamline loan. However, most if not all lenders will request the borrower’s credit report to satisfy an internal minimum credit score. The lender will also need to know that you have made on-time payments the last 12 months.
FHA Streamline Details
The FHA streamline loan does have a few requirements that borrowers must meet but they’re relatively simple. There needs to be what the FHA calls a “net tangible benefit” which means the new monthly payment must be reduced by at least 5 percent or the borrower is refinancing out of an adjustable rate loan into a fixed rate product.
There are closing costs with FHA loans as with any other but in the instance of a streamline, the borrowers may not roll their closing costs into the loan and need to be paid out of pocket or with a lender credit.
Lenders will verify that there are no mortgage payments more than 30 days past the due date within the previous six months and no more than one such payment within the past 12. FHA loans also have a seasoning requirement which means the existing FHA loan must be at least 210 days old before being streamline eligible and the program is only available as an FHA to FHA program.
FHA Streamline Mortgage Insurance Premiums
FHA loans are insured by the premiums paid by the borrowers. FHA loans have both an upfront mortgage insurance premium and an annual one which is paid monthly. In fact, the FHA can be thought of less as a mortgage company and more so an insurance company. These premiums can vary based upon when the existing mortgage was first originated.
For FHA loans funded before June 1, 2009 the mortgage insurance premium is grandfathered and eligible for reduced rates. The upfront premium for these loans is just .01 percent of the loan and the annual premium is 0.55 percent. For loans funded after that date? The premiums are higher.
The upfront premium for loans on or after June 1, 2009 is 1.75 percent of the loan amount and the annual premium can be anywhere from 0.45 percent to 1.30 percent of the loan, depending upon the term and equity.
Compare Before You Commit
For borrowers who have equity in their homes and are considering an FHA streamline, they may want to consider a conventional refinance. The mortgage insurance premiums for FHA loans from June 1, 2009 onward are rather pricey.
If you’re considering an FHA streamline due to the reduced documentation requirements yet still have good credit and can verify income, a conventional option should be considered as well.
The FHA streamline mortgage is a solid program and helps those reduce their monthly payments or refinance out of an adjustable rate to a fixed in very little time. Contact your lender to see if this program is right for you. If you have an FHA loan now, it probably is.