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How About An FHA Streamline Refinance?

by Peter G. Miller
July 10th, 2008

One of the smartest ideas remaining in the FHA and VA programs is the concept of streamline refinancing.

Essentially the idea is that if you can afford your current mortgage you can surely afford your current mortgage if the monthly payments are reduced. The result is that with a streamline refinance there are relatively few application requirements.

Note that with a streamline refinance you can get either a new 30-year term or you can add 12 years to your current loan term. Making a loan longer at the same rate or a lower rate has the effect of reducing the monthly cost for principal and interest.

How few?

Just look at what HUD now says in its latest update regarding the FHA streamline program:

Streamline refinances are designed to lower the monthly principal and interest payments on a current FHA-insured mortgage and must involve no cash back to the borrower, except for minor adjustments at closing not to exceed $500. Streamline refinances can be made with or without an appraisal. FHA does not require repairs to be completed (except for lead-based paint repairs) on streamline refinances with appraisals; however, the lender may require completion of repairs as a condition of the loan. The mortgage amount limits may never exceed the statutory limits except by the amount of any new upfront MIP.

Streamline refinance processing and underwriting instructions are described in HUD Handbook 4155.1 REV-5 1-12 but are generally as described below. The mortgage amount limits may never exceed the statutory limits except by the amount of any new upfront MIP.

A. Streamline Refinances WITHOUT an Appraisal. The maximum insurable mortgage is the lower of the two calculations shown below:

1. Original Loan Amount: The original principal balance on the mortgage (which will include any upfront mortgage insurance premium) plus the new upfront premium that will be charged on the refinance, or

2. Existing Debt: Add the sum of the existing FHA insured first lien, closing costs, reasonable discount points and the prepaid expenses necessary to establish the escrow account, and subtract any refund of upfront mortgage insurance premiums (UFMIP). The existing first lien may include the interest charged by the servicing lender when the payoff is not received on the first day of the month as is typically assessed on FHA mortgages, late charges or escrow shortages, but may not include delinquent interest.

This mortgage calculation process applies only to owner-occupied properties. Investment properties, even if originally acquired as principal residences by the current borrowers, may only be refinanced for the outstanding principal balance.

The term of the mortgage is the lesser of 30 years or the remaining term of the mortgage plus 12 years.

B. Streamline Refinance WITH an Appraisal (No Credit Qualifying). The maximum insurable mortgage is the lower of the appropriate loan-to-value ratio applied to the appraiser’s estimate of value or the sum of the existing indebtedness and related closing costs and prepaid expenses for the refinance; both are described below.

1. LTV Ratio Applied to Appraised Value: Multiply the appraised value of the property by the appropriate factor as shown in the chart in HUD Handbook 4155.1 REV-5 (1-12) for the property’s value and the State where it the property is located. (A list of states and their closing costs averages may be found in Appendix II.)

2. Existing Debt: Add the sum of the existing FHA insured first lien, closing costs, reasonable discount points and the prepaid expenses necessary to establish the escrow account, and subtract any refund of upfront mortgage insurance premiums (UFMIP) as described below. The existing first lien may include the interest charged by the servicing lender when the payoff is not received on the first day of the month as is typically assessed on FHA mortgages, late charges or escrow shortages, but may not include delinquent interest.

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