If you have an FHA or VA loan, you have options when it comes to refinancing. If you’re refinancing strictly to lower your interest rate or change the loan’s term, you have the advantage of using the streamline refinance option.
The streamline refinance as the name suggests, is a much faster and easier way to refinance. You don’t have to provide as much documentation, and you can close faster. The streamline refinance loans usually have lower closing costs too.
Here’s everything you must know about the streamline refinance option.
Which Loan Programs Offer the Streamline Refinance?
The streamline refinance is offered only on government-backed loans, such as the FHA and VA loans. If you currently have an FHA or VA loan, you can use the respective program’s streamline refinance program if you qualify.
This means if you have an FHA loan you can use the FHA streamline refinance program and if you have a VA loan, you can use the VA streamline refinance program. Both programs are very similar.
What Does it Mean to Refinance?
No matter what type of loan you have, to refinance, you pay off your existing mortgage with a new loan. Typically, the new loan has a better interest rate or term. In some cases, you can also borrow more than you owe and borrow against your home’s equity.
The streamline refinance, though, is only a rate/term refinance. You can’t take cash out of the home’s equity, but you can refinance to get a better term or lower interest rate.
How Does the Streamline Refinance Work?
A typical refinance requires you to provide documentation that you can afford the loan. Just like when you bought the house, you had to prove your income, assets, credit score, liabilities, and employment. The lender also ordered an appraisal and title work on the home.
This isn’t the case with a streamline refinance.
You don’t have to prove your credit score, income, or assets. You don’t even need to pay for an appraisal on the property.
The FHA and VA allow the streamline refinance for borrowers that qualify to lower their interest rate or get a better term. For example, if you have an adjustable rate mortgage right now and you can refinance into a fixed-rate term – it’s less risky, so lenders consider it a positive move.
Qualifying for the Streamline Refinance
If you don’t have to prove your income, assets, or credit score for a streamline refinance, how do you qualify?
It’s very simple.
The FHA and VA allow lenders to use your qualifying factors from when you bought the home or first took out the FHA or VA loan. They can use your income, assets, credit score, and home value from that time.
This means even if you make less money now, changed jobs, or your home value decreased, you can still qualify.
What lenders must make sure though for you to qualify is the following:
You have a net tangible benefit
This means you benefit from the refinance. Like we said earlier, usually this means saving money on your payment. If you qualify for a lower interest rate, your payment will drop and you benefit from refinancing. You could also benefit if you’re changing the term.
You made your last 12 payments on time
You must prove that you could afford your previous 12 months’ payments. If you could afford the higher payments and can refinance to get a lower payment, then you’re a good risk and can do the streamline refinance.
Pros and Cons of the FHA Streamline Refinance
Like any refinance loan, there are pros and cons to the FHA streamline refinance. Here’s what you should know.
You might lower your payment
Who doesn’t love to save money? If you lower your payment you’ll pay less interest and may even have more money to pay extra toward your principal and pay your loan off faster.
You can reduce your term’s riskiness
If you took an ARM loan when you bought the home because it offered the lowest rate or it was all you qualified for, you can refinance into a fixed rate now. locking in a fixed rate is a great way to ensure you can afford your payment for the rest of the term.
Your credit score doesn’t matter
Even if you had a tough time in 2020 during the pandemic and your credit score fell, you may still qualify. Most lenders don’t pull your credit or they don’t count it against you if your score fell. As long as you have a timely mortgage payment history, you can usually get approved.
You can refinance even if you’re upside down on your loan
If your home value fell and you owe more than the home is worth, you can still refinance. This is one of the only refinance options if you are upside down. It allows you to lower your payment and possibly get back on track.
You’ll pay closing costs
Each time you refinance, you’ll pay closing costs. If you’ll stay in the home for the long-term it might not matter. But if you think you’ll move soon, make sure paying the closing costs to lower the rate and/or save money makes sense. It doesn’t make sense to overpay closing costs and not reap enough savings because you’ll move soon.
You can’t take cash out of your home’s equity
Even if you have equity in your home, you can’t take it out with the streamline refinance. If you want to access your home’s equity, you must take a cash-out refinance that requires full documentation including a new appraisal.
You’ll pay mortgage insurance for the life of the loan
FHA loans have mortgage insurance for the life of the loan. Because you’re refinancing, you’ll start over with a new insurance policy and premiums.
Understanding the Upfront MIP Mortgage Refund
If you have an FHA loan now, you pay mortgage insurance monthly. You also paid upfront mortgage insurance when you first took out the loan.
When you refinance you typically don’t get any of that money back, but the streamline refinance is an exception. If you refinance within the first 3 years of taking out the FHA loan, you can get a partial refund of your upfront MIP.
If you refinance from an FHA loan to a streamline refinance, you can get between 10% – 70% of the insurance paid back. The refund starts at 70% six months after you took out your loan, which is the first chance you are eligible for the streamline refinance.
Each month, the insurance refund decreases 2%. For example, if you refinanced after 24 months, you’d get 34% of your insurance back and if you waited 36 months, you’d get 10% back.
The refund you get isn’t cash in hand, though. Your lender will put the refund toward the new upfront MIP you owe on the streamline refinance loan. This time, though instead of paying 1.75% of the loan amount, you’ll pay 0.55% of the loan amount, which is a much lower amount.
Who Should Use the Streamline Refinance?
Who should get the streamline refinance?
Let’s start with anyone that has an FHA or VA loan. But of course, not everyone will qualify for the program.
If you have an FHA or VA loan and you know you’ll be in the home long-term, it’s worth considering. When you can lock in a low interest rate, you can save money and not have to go through the hassle of full underwriting. You’ll save money on closing costs since the lender has to do less work and you can close fast.
You should also choose the streamline refinance if you’re struggling to afford your payments and rates dropped. If you can secure a lower rate or a less risky term, take it. Maybe you took out a 15-year term before but now you need a 30-year term to spread out your payments.
The key is that you benefit from the refinance and can improve your financial situation by refinancing. As long as you can prove a net tangible benefit and a timely mortgage payment history, you should be able to qualify.
If you have a government-backed mortgage, the streamline refinance is the easiest way to refinance and save money.