Since the financial crisis, the Federal Housing Administration’s Streamline refinance program has grown to be one of its most popular offerings. With no closing costs or credit verification requirements, a Streamline refinance represents one of the cheapest and fastest ways for consumers to improve the terms of their home loan. Keep in mind, however, that the program is only open to homeowners with an existing FHA mortgage.
Those aren’t the only factors that make the Streamline program unique. There are actually a number of key differences between a Streamline refinance and a traditional refinance when in terms of features and requirements, as you’ll see below:
Original mortgage must be an FHA loan
You are only eligible for a Streamline refinance if you currently have an FHA mortgage. After all, the FHA created this program, which removes nearly all of the major obstacles that typically conspire to prevent refinancing, in order to help homeowners who are near default on their existing loans.
No loan to value ratio
After the 2008 collapse in home values, many homeowners found themselves owing far more on their mortgages than their homes were worth. Since most mortgage lenders will not refinance a home with a high LTV ratio, many homeowners were therefore unable to take advantage of plummeting interest rates. In contrast, there’s no maximum Loan-to-Value ratio for FHA Streamline refinances, and the program actually actively encourages people with high ratios to apply.
No home appraisal required
A home appraisal is one of the most expensive parts of a typical refinance. By removing this requirement for Steamline refinances, the FHA saves qualified homeowners at least a few hundred dollars. More importantly, if your home has lost value since your last appraisal, the lack of an appraisal requirement prevents you from losing equity due to falling prices. Be careful, though; if you’re one of the few lucky home owners whose property value has actually increased in recent years, a home appraisal could actually increase your home equity and make it easier for you to pay off your mortgage.
No credit check required
The FHA also did away with required credit checks for the Streamline program, with the idea that people who qualified for an FHA mortgage originally should still be able to do so. Borrowers whose credit scores have worsened since taking out their mortgage will probably save thousands of dollars over the long term as a result of the credit check waiver, since it will open up lower interest rates to them. It’s also important to note that these generous accommodations come at a time when many other lenders have tightened their own underwriting standards considerably.
No income or job verification
The FHA does not require Streamline borrowers to provide proof of income or employment. When throwing out the requirement for income or job verification, the FHA reasoned that since they were already on the hook for a mortgage, the best way to reduce the chance of a borrower defaulting was to reduce their interest rate. Therefore removing income and credit checks as requirements for refinancing would make it less likely their borrowers would default.
Good payment history
Despite all of the aforementioned concessions, the FHA does still require Streamline applicants to have managed their finances responsibly in recent months. Potential applicants must have a perfect payment history on their mortgage for the last 3 months before they can apply for a Streamline refinance and cannot have more than a single late payment in the last 12 months. A homeowner’s mortgage must also be current at the time of the Streamline’s closing.
At least 210 days since your last refinance
Homeowners who have refinanced their mortgage before, must wait until at least 210 days have passed since their last refinance before they can use the Streamline program. This requirement is a nod towards lenders; since mortgage lenders are required to absorb most of the closing costs on Streamline loans, the FHA protects them against borrowers rapidly jumping between refinances.
Net Tangible Benefit
To get a Streamline refinance, the new home loan must actually benefit the borrower. A loan may therefore qualify in one of two ways:
- Reducing a borrowers mortgage payment by 5% or more
- Moving from an adjustable rate to a fixed rate
Loan balance cannot be increased to cover closing costs
In a traditional mortgage refinance, many fees and costs are bundled into the loan, but in a Streamline loan the borrower must either pay these closing costs upfront or the lender must credit them. Surprisingly, many lenders have done just that, opting to offer zero-cost Streamline refinances. The rule against rolling closing costs into a Streamline refinance could save you thousands of dollars both up front at closing and over the life of your loan.
By limiting the Streamline refinance program to current FHA mortgage holders, the Federal Housing Administration found a clever way to reduce its overall risk. By removing all of the typical obstacles to a mortgage refinance, the FHA allows homeowners to take advantage of today’s record low interest rates, thereby making it less likely that they will default. While a Streamline refinance might on the surface appear to allow someone who has poor credit, no job, and a worthless house to refinance their mortgage, doing so actually improves the FHA’s risk situation because they were already on the hook for the mortgage to begin with. At the same time, a borrower can net a great new interest rate and better prepare themselves for the future. In other words, it’s a win-win.