A house loan insured by the Federal Housing Administration (FHA) may qualify for a streamlined refinancing process through the FHA. While the FHA streamline refinancing scheme may seem ideal, mortgage lenders frequently impose additional restrictions on top of those established by the FHA.
So, while the FHA may allow you to refinance your underwater property despite your low credit score and lack of employment, most lenders will not do so unless you match their criteria.
But if you already have an FHA loan and meet the other requirements for an FHA streamline refinancing, it might be a fantastic opportunity for you. You should look at other refinancing possibilities for your mortgage, nevertheless.
Borrowers who already have an FHA mortgage can take advantage of the FHA streamline refinancing program to get a new FHA-insured mortgage without having to provide proof of income or assets. In addition, the borrower may qualify for less mortgage insurance premiums based on when the existing loan originated.
FHA Simplifies the Refinance Process
Make sure you qualify for a refinancing according to the FHA’s basic requirements before moving further.
- Your current mortgage must be insured by the FHA.
- Over the last year, you must have made on-time, complete mortgage payments.
- You must have a FICO credit score of 620 or greater. On an FHA loan, some lenders want a credit score of 640 or 680.
- You cannot have refinanced your mortgage during the last 210 days.
To find out if you qualify for a streamline refinancing with your existing mortgage lender, you should review these criteria. To shop around for a better mortgage rate, you can talk to other lenders. Provided one loan provider rejects your application, another may accept it if you meet their specific criteria.
You need to meet the FHA “net tangible benefit” requirement, which states that refinancing must either help you avoid future mortgage rate increases (refinancing from an adjustable rate mortgage to a fixed-rate mortgage works for this) or reduce your total monthly payment (principal, interest, and mortgage insurance) by at least 5%. The interest rate might remain the same while your payment is reduced by 5%.
However, many homeowners run into trouble when they realize they still must pay their monthly mortgage insurance fees after refinancing their FHA loan. Any savings from a lower interest rate might be nullified by increased mortgage insurance costs, depending on when your existing mortgage originated.
FHA Loan Insurance
Mortgage insurance premiums are established at the time the loan was finalized. Loans originated prior to June 1, 2009 are eligible for FHA’s lower upfront mortgage insurance rates as of June 11, 2012. These borrowers will be responsible for a 0.01% origination fee.
It’s important to note that the first mortgage insurance cost for loans originated on or after June 1, 2009, is 1.75 percent. On a $100,000 loan, that’s a huge swing from $10 to $1,750.
You can finance the upfront mortgage insurance payment into the cost of the loan.
As you probably already know, borrowers with FHA loans are responsible for both the initial mortgage insurance premium and the yearly mortgage insurance premium. When the loan-to-value ratio (LTV) is 78% or below, however, the yearly mortgage insurance cost is waived.
If you are refinancing a loan that originated before June 1, 2009, your yearly mortgage insurance cost will be 0.55%. A fee of 1.25 percent of the loan’s principal is required for the refinancing of a recent FHA loan. On a loan of $100,000, the yearly mortgage insurance cost would be $550 at the lower rate, while it would be $1,250 at the higher rate. Monthly payments at the increased mortgage insurance rate would add $58 to the cost of a loan of $100,000 over the life of the loan.
The Benefits and Drawbacks of a Streamline Refinance
Homeowners with FHA loans originated before June 1, 2009 stand to gain the most from the FHA streamline refinancing program, but anybody with a mortgage should see what their new monthly payment will be compared to their existing one.
- Ease of Eligibility. FHA loans are available to aid customers with less-than-perfect credit. Assess your eligibility for conventional and FHA loans if your credit score is below 740 but above 620 or 640. Traditional mortgage loans are the best option if your credit score is above 740.
- There is no need for a rating. An FHA streamline refinancing is a possibility even if you owe more on your mortgage than your property is worth, provided you can locate a lender that will not conduct an assessment. Even while the FHA claims an appraisal is unnecessary, it’s not always that simple.
- Housing Finance Protection. New FHA borrowers are subject to paying upfront mortgage insurance premiums. Additionally, yearly mortgage insurance payments are required if the loan-to-value ratio is above 78%. The cost of your loan and your regular payments will go up because of mortgage insurance. Your new mortgage insurance rates will be higher if you obtained your loan after June 1, 2009.
- Final Expenses. Borrowers are not allowed to add closing fees to their loan balance, per FHA regulations. The typical closing fee is about 3% of the loan amount, or $3,000 on a $100,000 loan, however this can range greatly depending on the location of the borrower and the lender. When refinancing a traditional loan, closing expenses are often included into the new loan amount. You may either pay the closing expenses out of pocket for an FHA streamline refinancing, or you can locate a lender that would conduct a “zero cost refinance,” where the lender pays the closing costs in exchange for a slightly higher interest rate throughout the life of the loan.
If you’re thinking about a no-cost FHA streamline refinance, it’s important to also look into refinancing into a conventional loan to determine which mortgage product will provide you with the best combination of low monthly payments and low total interest paid over the life of the loan.
If you were authorized for an FHA-insured mortgage before June 1, 2009, you may be able to refinance into a reduced interest rate by taking advantage of the FHA’s streamlined refinance program.
However, it’s always worth it to talk to many lenders to see what they can do, even if your mortgage was granted after that date. In spite of the low barrier to entry, borrowers with limited home equity or credit issues may need to shop around for a loan approval. The time and energy spent will be well worth it if it means saving thousands of dollars every year.