The FHA streamline refinance process is an option available to existing FHA borrowers hoping to find a cheaper home loan without the hassles of a full-blown refinance. The streamline process allows mortgage lenders to bypass the finer details of underwriting such as property appraisals.
Homeowners Guide To The FHA Streamline Refinance Process
What Is an FHA Streamline Refinance?
Since the early 1980's, the Federal Housing Administration has allowed streamline refinances on FHA-insured mortgages. The "streamline" process refers to the minimal amount of documentation and underwriting required by a mortgage lender. The basis of the streamline process developed from the idea that if good borrowers can maintain their existing mortgage, they will have no problems refinancing into a cheaper home loan with lower monthly payments.
FHA Loan Requirements For a Streamline Mortgage Refinance
The initial requirements for a streamline refinance state the existing mortgage must already be insured by FHA and must be current (no delinquent mortgages). Additionally, the refinance process should result in a new home loan that lowers the borrower's monthly principal and interest payments. And during this process, the borrower cannot take cash out from his or her equity through the new mortgage.
FHA mortgage lenders can offer this refinance as either a "no-cost" refinance or roll the costs into the new mortgage. To be clear, a "no-cost" refinance typically means no out-of-pocket expenses for the borrower. For this refinance and most other "no-cost" refinances, lenders charger a higher rate of interest than if a borrower were to finance or pay the closing costs in cash. With this higher interest rate, lenders receive a premium and can then cover closings costs resulting from the transaction. Alternatively, borrowers who prefer a lower interest rate can include the closing costs into the balance of the new mortgage--this move requires sufficient equity available in the property.
Refinance Your FHA Home Loan With or Without An Appraisal
While many lenders are scrutinizing home values nowadays, the FHA streamline process allows existing borrowers to skip the appraisal process entirely. Since no cash out is allowed and on time payments are required, FHA mortgage lenders can bypass the finer details of underwriting and help these borrowers refinance into a lower rate and smaller monthly payments--two things which helps borrowers, and makes loans less risky for banks. Without an appraisal, the term of the new mortgage will be limited to the lesser of the existing mortgage term plus 12 years, or 30 years.
On the other hand, some borrowers may want to provide an appraisal in case they have trouble with credit qualifications. With an appraised value of the home, lenders may apply an "appropriate" loan-to-value ratio limit based on the appraiser's estimated value. While this route may be more restrictive and time consuming, the option is still available to those who need it. FHA does not necessarily require a credit report or impose credit qualifications, but a lender may require a report as a matter of their own credit policy. Remember, the FHA does not make loans themselves. They simply insure the loans made by FHA approved mortgage lenders.
Compared to other conventional loan options, the FHA streamline refinance process can really make life easier for existing borrowers. And although home values have dropped in many areas, the no appraisal standard still makes sense for the FHA since loan balances are not increased by a cash out and the borrower holds a decent payment record on the existing loan. For many borrowers, the streamline refinance process will allow more flexibility to obtain a cheaper home loan, while avoiding the hassles of a traditional refinance.
Heindrick So is a mortgage consultant at a local Bay Area Real Estate Brokerage--specializing in residential wholesale lending. Heindrick frequently contributes to various finance columns, ranging from home loans and mortgages, debt management, and other personal finance topics.