the FHA streamline refinancing The program allows borrowers who have a mortgage insured by the Federal Housing Administration to refinance their loans at lower rates more easily and at a lower cost.
Under FHA Simplified Refinancing, borrowers provide minimal documentation to the lender, even if they owe more on their mortgages than their home is worth. Lenders don’t need to get a home appraisal, no credit check, or income check as long as the mortgage is FHA insured.
This is one of the reasons people financially impacted by the coronavirus may want to consider streamlining refinancing from the FHA. Even if you lost your job or had difficulty making monthly payments, you may still be able to refinance your FHA loan at a lower rate.
How does the FHA rationalization program work?
The FHA rationalization program is divided into non-credit-eligible refinances and credit-eligible refinances. Both types are designed to reduce monthly principal and interest payments on an FHA guaranteed mortgage.
The difference is that streamlined credit-eligible refinances require the lender to prove your ability to repay the loan by verifying income, checking credit, and confirming your loan. debt to income ratio. These requirements do not apply to refinancing not eligible for credit.
In general, streamlined FHA refinances are similar to traditional refinancing in that they are available as Fixed Adjustable Rate Mortgage (ARM) options and 15 or 30 year terms – but there are a few. significant differences. With FHA streamlined refinancing:
- Reviews are not required. Whatever the value of your home, the FHA will insure your loan. It uses the original purchase price of your home instead of an appraisal.
- Cash-out refinancing are not authorized. You cannot cash out more than $ 500. Any cash withdrawn is only for minor adjustments at the close.
- Refinancing should result in a “net tangible benefit” for the borrower which translates into a 0.5 percentage point reduction in the combined interest rate and mortgage insurance premium (PMI). By refinancing, the FHA seeks to allow you to reduce the term of your loan, lower your mortgage rate, or both.
To apply for an FHA streamlining refinance, you must first find an FHA approved lender. Keep in mind that while you can use your current FHA approved lender, it is worth it. compare the prices. Loan terms and fees for FHA loans vary from lender to lender, and price comparisons can help you find the best deal.
You will also need to gather documentation. Even though minimal documents are required for an FHA streamlining refinance, you will still need a few essentials. This can vary depending on the lender, but here are some documents to keep:
- An up-to-date mortgage statement to show that payments are up to date
- A current FHA mortgage note, to indicate your interest rate and payment
- Home insurance information
- Two months of bank statements to prove you have enough funds to pay for out-of-pocket expenses
When shopping around, remember that there are costs associated with this type of refinancing. You will have to pay an advance mortgage insurance premium (MIP) in addition to monthly premiums. FHA loans issued before June 2009 require an initial premium of only 0.01 percent. All other loans require an initial premium of 1.75% of the loan amount. Annual mortgage loan insurance premiums are 0.45% to 1.05% of the loan amount each year of your loan term.
With MIP, your lender can also charge closing costs. Unlike initial mortgage insurance premiums, the FHA does not allow lenders to include closing costs in the new mortgage amount for a streamlined refinance. This is why some lenders offer “no cost” refinancings at no cost to the borrower. Instead of closing costs, lenders charge a higher interest rate on the new loan. Of course, you also have the option of paying the closing costs in cash.
Streamline FHA Eligibility Guidelines
The FHA Simplified Refinance Program has more flexible loan guidelines than traditional refinances when it comes to appraisals, credit checks, and income verification. However, it still imposes a certain number of eligibility conditions on borrowers.
The requirements vary by lender, but here are the minimum standard guidelines for FHA rationalizations set out by the FHA.
1. The mortgage must already be insured by the FHA
This is the main rule. In order to use the FHA rationalization program, you must already have an FHA insured mortgage.
2. You must view a payment history on time
To be eligible, the FHA requires that you have a regular history of on-time mortgage payments. Fortunately, even if you’ve made a late payment, you still have some leeway. As long as you’ve made the last six payments on time, you may have a missed payment on your file.
Here’s what the FHA is looking for in terms of payment history:
- If the mortgage has less than 12 months of payment history, you must have made all mortgage payments on time.
- If the mortgage has 12 or more months of payment history, you are entitled to a 30-day late payment within the past 12 months, but you must have made all mortgage payments for three months prior to your due date. request for refinancing. .
3. You can only apply after a waiting period, defined as follows:
- You made at least six on-time payments on your current FHA mortgage
- It’s been at least six months since your first payment was due
- 210 days have passed since the day your current mortgage was closed
4. There must be a “net tangible benefit”
The FHA states that there must be a “net tangible benefit” to the borrower. In other words, there must be a legitimate reason for refinancing which improves the financial position of the borrower. For example, if a borrower’s new mortgage payment – principal and interest plus PMI – were at least 0.5% less than the original mortgage payment, it would be considered a net tangible benefit.
Refinancing from an ARM to a fixed rate mortgage can also be seen as a net tangible benefit.
5. You have to pay mortgage insurance premiums
FHA Simplified Refinancing, like all FHA loans, requires you to pay mortgage insurance premiums. Getting streamlined refinancing will not eliminate PIM.
First of all, you will need to pay an initial MIP. This is paid at closing, unless your lender offers cost-free refinancing in exchange for a higher rate. Then you will pay the annual PMI which is broken down into monthly installments and included in your mortgage payment each month. Here is the cost of each premium for FHA loans open as of June 1, 2009:
- Initial mortgage loan insurance premium: 1.75% of the loan amount
- Annual mortgage loan insurance premium: 0.45% to 1.05% of the loan amount each year of your loan term
Pros and Cons of an FHA Streamlining Refinance
Like all refinancing programs, there are pros and cons to streamlined refinancing through the FHA.
Here are some of the advantages of an FHA Streamlining Refinance over other programs:
- Lower monthly payment – One of the main advantages is the possibility of making your monthly payments more affordable. The FHA has guidelines on how to reduce the payment, but generally there must be a reduction of at least 5 percent of the mortgage payment principal and interest plus the mortgage insurance premium to qualify.
- No assessment required – The loan amount is determined by what you owe and not by the current value of your home. This can be very beneficial for submarine borrowers.
- No income verification – Unlike a conventional mortgage, you will not need to verify your income.
- No credit check – Having a low credit score will not prevent you from refinancing with this program.
The FHA’s streamlining refinance program also has some drawbacks. Here are some of the potential pitfalls:
- You must have an FHA loan. If you are not currently an FHA borrower, you will not be eligible for this program; it is not open to borrowers with a conventional mortgage.
- The program only allows cash back rewards of $ 500 or less for minor adjustments at close.
- You pay an additional mortgage insurance premium fee. If you have an FHA loan, you’ve already paid an initial mortgage insurance premium on your first financing. When you refinance with an FHA rationalization, you will again have to pay mortgage insurance premiums up front.
- There are strict rules for refinancing. Even though the FHA does not require an appraisal for income verification, it does issue guidelines for lenders. You must have a perfect three month payment history to qualify – only one late payment is allowed in the last 12 months. Additionally, if you recently entered into an FHA loan, you must wait 210 days from your closing date to use the FHA Rationalization Program. The rationalization must also have a “net tangible benefit” as defined by the FHA, which may be difficult to achieve for some borrowers.
What are the streamlined FHA fares today and is it worth it?
FHA loan rate are historically low and it is possible to find lenders offering below average rates. You can use a mortgage refinance calculator to see how lowering your rate and increasing the term of your loan would impact your financial situation.
Overall, if you have an FHA mortgage that is at least six months old and you think refinancing would lower your rate and lower your monthly mortgage payment, then streamlined FHA refinancing could benefit you.
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