If you have an existing FHA mortgage, you may qualify for a special type of refinancing product known as an FHA streamline refinance. Though it’s important to do your due diligence and carefully consider other refinance options – as well as the option to do nothing – homeowners who refinance through this program are often able to reduce their total monthly payments by 5% or more.
An FHA streamline refinance isn’t for every homeowner carrying an existing FHA mortgage. Here’s a closer look at the details of the FHA streamline refinance program, possible fees and expenses, eligibility requirements, and overall suitability.
FHA Streamline Refinance – Characteristics & Benefits
FHA streamline refinancing is sometimes called “FHA-to-FHA refinancing” to distinguish it from non-FHA refinancing products. FHA streamline refinancing bears some resemblance to VA streamline refinancing, also known as IRRRL. However, VA streamline refinancing is only available to eligible military service members and their immediate families, while FHA streamline refinancing is available to most homeowners with existing, nondelinquent FHA loans.
According to the U.S. Department of Housing and Urban Development (HUD), all FHA streamline refinances must meet certain qualifying criteria:
- The home loan (current mortgage) to be refinanced must already be FHA insured. Conventional loans and other non-FHA mortgage loans, including VA loans, are not eligible.
- The borrower must be current on the existing loan’s payments.
- The refinance must result in a “net tangible benefit” to the borrower, defined broadly as leaving the borrower in a better financial position than the existing FHA home loan does.
- Borrowers can take out no more than $500 cash on the refinanced loan, not including refunds of any unused escrow balances on the existing loan. Borrowers who wish to take out more cash must opt for an FHA cash-out refinance, a different loan type that’s not eligible for the streamline process.
- The loan amount cannot be increased to include, or “wrap,” closing costs, the sole exception being upfront mortgage insurance premiums (UFMIP).
1. No Appraisal Required
One of the biggest benefits of an FHA streamline refinance is the lack of an appraisal requirement. Under most circumstances, borrowers don’t need to commission a new home appraisal during an FHA-to-FHA refinance. This reduces closing costs by anywhere from $200 to $500, depending on the cost of the lender’s appraisal.
2. Credit Qualifying vs. Non-Credit Qualifying Streamline Refinance
FHA streamline refinance loans come in two varieties: credit qualifying and non-credit qualifying.
A non-credit qualifying loan uses the existing loan’s qualification information to underwrite the refinance loan, obviating the need for the borrower to re-submit detailed information for income, asset, and employment verification.
A credit qualifying loan requires a new credit check: a “hard pull” wherein the lender obtains the borrower’s credit report. It may also necessitate a reevaluation of the borrower’s income (income verification), debt-to-income ratio, and other underwriting qualifications. These requirements may lengthen the closing process and make more work for borrowers, and could temporarily impact borrowers’ credit scores as well.
In both cases, at least one borrower from the previous mortgage must remain on the new loan. Per current FHA policy, a non-credit qualifying mortgage refinance is permitted only when all borrowers from the previous mortgage remain on the new loan, unless the previous mortgage has been assumed or one or more original borrowers may be legally removed from the title and new loan by death, divorce, or legal separation. Borrowers may be added to credit and non-credit qualifying mortgages.
3. Origination Exemptions
The “streamlined” nature of FHA streamline refinancing is due in part to the expediency of the origination process. In addition to waiving the appraisal requirement, FHA streamline refinancing exempts certain other steps required in purchase loans and some non-FHA refinance loans. These include:
- Checking borrower ineligibility due to delinquent non-tax debt
- Checking borrower ineligibility due to delinquent federal tax debt
- Applying property eligibility and acceptability criteria
- Applying National Housing Act statutory limits
- Applying nationwide mortgage limits
- Loan-to-value (LTV) limitations based on the borrower’s credit score
- Property underwriting
- Borrower underwriting using the TOTAL mortgage scorecard
In addition, non-credit qualifying FHA streamline refinance loans waive certain manual underwriting steps normally required of mortgage lenders.
4. Eligible Property Types & LTV Limits
Individual homeowners are eligible for FHA streamline refinance loans on owner-occupied primary residences, qualifying second homes, and certain non-owner-occupied investment properties. The FHA also allows government agencies and certain qualifying nonprofits to execute FHA-to-FHA refinances on residential properties that they own, but this allowance is unlikely to apply to individuals.
The maximum LTV ratio on most FHA refinance loans is 97.75% for primary residences, which is much higher than the 80% limit on standard FHA refinance loans. Also, FHA streamline refinance requires a maximum mortgage amount, or “maximum base loan,” calculation. For maximum base loan calculation purposes, primary and secondary residences are considered separately from investment properties.
- Primary and Secondary Residences. The maximum base loan for these is the lesser of 1) the outstanding principal balance of the existing mortgage as of the previous month, plus interest and any mortgage insurance premium (MIP) due on the existing mortgage, or 2) the total principal balance of the existing mortgage, including financed upfront mortgage insurance premium (UFMIP). Any refund of UFMIP must be subtracted from the loan amount.
- Investment Properties. The maximum base loan amount is the lesser of 1) the outstanding principal balance of the existing mortgage as of the previous month, or 2) the original principal balance of the existing mortgage including financed UFMIP. Again, any UFMIP refund must be subtracted to complete the calculation.
5. Upfront Mortgage Insurance Premium (UFMIP) Refund
Homeowners who complete FHA streamline refinance origination less than three years after closing on their previous mortgage may be eligible for a partial refund of UFMIP.
The refundable portion of UFMIP ranges from 80% at one month after the previous loan’s closing to 10% at 36 months after the previous loan’s closing, declining by two percentage points each month. For instance, at month 14, the UFMIP refund amount is 54%; at month 16, the UFMIP refund amount is 50%.
For practical purposes, the maximum UFMIP refund is 68%, since borrowers don’t qualify for FHA streamline refinance before six months have passed from the original closing date.
Borrower Eligibility & Requirements
FHA-to-FHA refinance loans come with three key borrower eligibility and qualification requirements.
1. Mortgage Seasoning
The term “seasoning” refers to the age of the original mortgage loan. Per HUD policy, all of the following seasoning conditions must apply for an FHA mortgage loan to be deemed eligible for FHA-to-FHA refinance:
- At least 210 days (seven months) have passed from the closing date of the original mortgage loan.
- The borrower has made at least six payments on the original mortgage loan.
- At least six full months have passed from the first payment due date on the original mortgage loan, irrespective of the number of payments made.
- On assumed mortgages only, the borrower has made at least six payments since assuming the loan.
All timeframes are retroactive from the date of the assignment of an FHA case number, which occurs early in the FHA streamline refinance process.
2. Mortgage Payment History
For both credit and non-credit qualifying mortgages, the borrower must have six consecutive months of on-time payment history on the previous loan, retroactive from the date of the FHA case number assignment. An on-time payment is defined as a payment made in full during the month in which the payment is due. During the prior year, the borrower may have no more than one late payment past due by 30 days or more.
For example, a borrower may qualify for an FHA streamline refinance if their only late payment in the prior year happened nine months before the date of the FHA case number assignment. However, they would be disqualified if their only late payment in the prior year happened three months prior to the case number assignment date.
3. Net Tangible Benefit
The most complex FHA-to-FHA refinance requirement is the so-called “net tangible benefit” test. HUD defines “net tangible benefit” as a change that reduces the mortgage’s combined rate or loan term, or changes an ARM to a fixed-rate mortgage, such that the mortgage-holder receives a net financial benefit. “Combined rate” refers to the sum of the interest rate on the mortgage plus the MIP rate.
The net tangible benefit test applies to certain common FHA-to-FHA refinance situations:
- Refinancing a Fixed-Rate Mortgage to a New Fixed-Rate Mortgage. The new combined rate must be at least 0.5 percentage points (50 basis points) below the previous combined rate.
- Refinancing a Fixed-Rate Mortgage to an Adjustable-Rate Mortgage (ARM). For both new one-year and hybrid ARMs, the new initial combined rate must be at least 2 percentage points (200 basis points) below the previous combined rate.
- Refinancing an ARM With Less Than 15 Months to the Next Payment Change Date to a New Fixed-Rate Mortgage. The new combined rate must be no more than 2 percentage points (200 basis points) above the previous combined rate.
- Refinancing an ARM With Less Than 15 Months to the Next Payment Change Date to a New ARM. For both new one-year and hybrid ARMs, the new initial combined rate must be at least 1 percentage point (100 basis points) below the previous combined rate.
- Refinancing an ARM With More Than 15 Months to the Next Payment Change Date to a New Fixed-Rate Mortgage. The new combined rate must be no more than 2 percentage points (200 basis points) above the previous combined rate.
- Refinancing an ARM With More Than 15 Months to the Next Payment Change Date to a New ARM. For new one-year ARMs, the new initial combined rate must be at least 2 percentage points (200 basis points) below the previous combined rate. For new hybrid ARMs, the new initial combined rate must be at least 1 percentage point (100 basis points) below the previous combined rate.
Additionally, when an FHA-to-FHA refinance results in a reduction of the mortgage term, the net tangible benefit test is met if the following three conditions apply:
- The existing mortgage’s remaining amortization period is reduced.
- The new interest rate is equal to or less than the original interest rate.
- The combined monthly payment – principal, interest, and MIP – on the new mortgage exceeds the combined monthly payment on the old mortgage by no more than $50.
FHA Streamline Refinance Fees
FHA streamline refinance loans have relatively light paperwork and underwriting requirements, but that doesn’t mean they’re entirely free of borrower-borne costs.
1. Mortgage Insurance
Like FHA purchase loans, FHA streamline refinance loans require mortgage insurance premiums (MIP). Like private mortgage insurance, FHA mortgage insurance protects the lender – and, ultimately, the FHA – from borrower default.
Per HUD, FHA streamline refinance borrowers are responsible for two separate MIPs:
For loans used to refinance a previous FHA-endorsed mortgage issued on or before May 31, 2009, UFMIP is 0.01% of the base loan amount. For all other loans, UFMIP is 1.75% of the base loan amount. UFMIP is the only closing cost eligible to be wrapped into an FHA streamline refinance loan.
Depending on the initial LTV, annual MIP is as follows:
- Mortgages With Terms Longer Than 15 Years and Base Loan Amounts Less Than or Equal to $625,000: 0.8% to 0.85%
- Mortgages With Terms Longer Than 15 Years and Base Loan Amounts Above $625,000: 1% to 1.10%
- Mortgages With Terms Less Than or Equal to 15 Years and Base Loan Amounts Less Than or Equal to $625,000: 0.45% to 0.7%
- Mortgages With Terms Less Than or Equal to 15 Years and Base Loan Amounts Greater Than $625,000: 0.45% to 0.95%
In all cases, loans with initial LTVs under 90% require annual MIP for the first 11 years of the term. Loans with higher initial LTVs require annual MIP for the full term.
2. Origination Fee
The origination fee is a catch-all expense into which the lender may bundle together several discrete fees, such as escrow and document fees. If you don’t receive an itemized accounting of your loan’s origination fee, you are entitled to ask your lender for one. Origination fees vary widely by lender and property value, but generally do not exceed 1% of the base loan amount.
3. Processing & Underwriting Fees
These clerical fees are generally lower on FHA streamline refinance loans than on purchase loans and standard refinance loans. However, they can vary widely by lender. Expect an average combined cost of about $1,000.
4. Title Insurance
The purpose of title insurance is to protect the homeowner’s interest in the insured property and cover the cost of fixing any title defects. Title insurance is among the dearest closing costs; $1,000 is a reasonable average, though policy costs vary by issuer, jurisdiction, and the complexity of the title search process. The underlying value of the insured property has little bearing on title insurance costs.
5. Prepaid Property Taxes
Before closing, FHA streamline refinance borrowers may be required to prepay property taxes for the following six-month period. This one-time payment is separate from the tax portion of the borrower’s monthly escrow payments, which begin after closing.
=Depending on local tax rates and the underlying value of the property, the one-time tax payment can range from a low three-figure sum to several thousand dollars.
6. Prepaid Hazard Insurance
FHA streamline refinance borrowers may be required to prepay the following year’s hazard insurance, or homeowners insurance, premiums. Hazard insurance costs vary widely depending on the underlying value of the property and its age, condition, contents, and risk profile. In many cases, hazard insurance premiums are paid outside of closing.
7. Recording Fee
This fee covers the cost of recording the transaction with the appropriate city or county authorities. Costs vary by jurisdiction but generally come in below $250.
8. Other Fees
This is not an exhaustive list of possible fees associated with FHA streamline refinancing. Depending on your home’s location and situation, you may be required to pay relatively minor fees such as flood certification, which generally comes to less than $30. You may also be required to pay additional ongoing fees, such as flood insurance premiums.
On the bright side, your FHA streamline refinance lender will not require you to pay for certain services associated with purchase loans, such as a home inspection.
My wife and I were fortunate to get a very favorable mortgage rate when we purchased an older home a few years back. After we bought, rates rose steadily, pressuring prospective homebuyers already feeling the squeeze from rapidly rising home prices in many markets. With lower interest rates elusive, demand for refinancing dried up.
Now that mortgage rates are back near historic lows and could remain down for some time, many homeowners who bought after us are looking to take advantage of low interest rates by refinancing their mortgages.
We might find ourselves among them in due course. After all, we’re just a handful of years into our 30-year fixed term, so there’s plenty of time for prevailing rates to fall below our original benchmark and for a refinanced home loan to make financial and practical sense.