A quick and easy FHA refinance
The Federal Housing Administration (FHA) streamline refinance may be the easiest way for some homeowners to get today's best mortgage rates and quickly reduce their monthly payments.
Designed for existing FHA customers, the "streamline refinance" allows homeowners to refinance with less documentation and underwriting since no appraisal is required, a huge advantage for underwater homeowners. The lack of typical refinance requirements, such as income and credit verifications, allows the process to move more quickly.
However, despite the simplified process, there are still a set of specific requirements from the FHA and perhaps from individual lenders that must be met. Different lenders have different requirements.
The advantages
Probably the most important advantage to an FHA streamline refinance is that there is no required appraisal. Lenders will either use the value of the last FHA appraisal or your home's original value.
Another advantage is that borrowers aren't required to provide income, employment or credit verification.
Lastly, FHA mortgage rates have also been substantially lower than conventional mortgage rates in recent years, adding to the list of the program's benefits. According to recent data from HSH.com, a conventional 30-year fixed-rate mortgage averaged 3.68 percent, while an FHA-backed 30-year fixed was 3.41 percent, for the week ending Feb. 8.
Specific rules do apply
Here are several specific standards that borrowers much meet:
- The refinance must reduce payments: The refinance terms must reduce your monthly payment by at least 5 percent.
- You must be current: You are only allowed one late payment in the previous year. Furthermore, you must have made your last three mortgage payments in full and on time.
- There's a refinance waiting period: Monthly payments must be made for at least six months before you can apply.
- Your loan balance cannot increase: All of the closing costs and fees associated with your loan must be paid out of pocket -- they cannot be financed into the loan amount. If you don't have cash available to pay for the closing costs, your lender can offer you a higher-than-market interest rate in exchange for paying the closing costs.
Mortgage insurance premiums
An FHA streamline refinance, like all other FHA mortgages, requires upfront and annual mortgage insurance premiums.
If your current mortgage was endorsed by the FHA before June 1, 2009, the upfront premium is 0.01 percent of the loan amount. In addition to the upfront premium, these loans also require an annual premium -- paid monthly -- of 0.55 percent of the base loan amount.
FHA mortgages endorsed after June 1, 2009 have a much higher upfront premium of 1.75 percent. The annual premium varies by loan term and loan-to-value (LTV) ratio. It ranges from 1.25 percent (30-year term, LTV over 95 percent) to as low as 0.35 percent (15-year term, LTV under 90 percent).
Currently, the annual premium must be in place for at least five years, and after that time, it can be cancelled whenever the loan balance has been paid down to 78 percent.
Changes are coming
For FHA loans registered after April 1, 2013, the annual premium will increase by 0.10 percent. In addition, the annual premium will have to be paid for the entire life of the loan if the initial LTV is more than 90 percent.
If you're considering a streamline refinance, act now before the April changes go into effect. Increased premiums mean fewer borrowers will be able to lower their monthly payment by the five percent requirement.
