FHA Mortgage 101: FHA Streamline Refinance
By: Vanessa Rodriguez | August 6th, 2010
August 6, 2010 (FreeRateUpdate.com) – The Federal Housing Administration began offering streamline refinancing in the early 1980s as a way to help homeowners lower their interest rates and monthly mortgage payments with ease and little costs. The FHA streamline refinance can lower a homeowner’s total mortgage payment by 5% or more. It also allows borrowers to refinance out of adjustable rate mortgage loans or reduce the term of the loan. The FHA streamline refinance is available to investors as well.
The Federal Housing Administration only insures loans originated by approved mortgage lenders. Lenders offer FHA streamline refinances in different ways. Some lenders offer “no cost” refinances, which means zero upfront costs, i.e. closing costs, to the borrower. These lenders charge a higher interest rate on the new loan to compensate for closing costs, which are initially covered by the lender. Alternatively, other FHA lenders may include the closing costs into the new loan. If closing costs are wrapped into the loan, then these lenders require a full appraisal of the property.
According to the new rules for an FHA streamline refinance (See: Revised Streamline Refinance Transactions,) to qualify the original loan must be FHA insured. An appraisal is not required unless closing costs are included in the new loan amount. The borrower must have made at least 6 months payments on the original FHA loan. If the original mortgage is less than a year old, then the borrower cannot have any delinquent payments in addition to have made all mortgage payments in the months they were due. If the original mortgage is more than a year old, then the borrower is allowed only one delinquent payment, albeit not in the 3 months prior to the FHA streamline refinance application, in addition to have made all monthly payments. The borrower may not receive any cash above $500 from the loan proceeds. Any assets that are needed to close must be verified. Employment must also be verified. The maximum loan to value ratio is 97.75%. A credit score of 620 or more is required. Finally, there must be equity in the property in order to qualify for an FHA streamline refinance.
FHA offers homeowners favorable options to refinance into a fixed rate mortgage or adjustable rate mortgage. It also allows homeowners to reduce the term of their loans. Investment properties and secondary residences qualify for an FHA streamline refinance as well. If a borrower would like to refinance from a fixed rate mortgage to an ARM, then FHA allows the borrower to refinance to a one-year ARM with an interest rate at least 2 percentage points less than the original loan. If a borrower would like to refinance from an adjustable rate mortgage to a fixed rate, then the new interest rate cannot be any more than 2 percentage points over the interest rate of the original loan. If a borrower would like to reduce his loan term, then FHA forbids any cash-out, therefore it must be closed as a rate and term refinance. Investment properties and secondary homes are limited to only total mortgage payment reductions and cannot streamline to ARMs.
Although, due to the economy the Federal Housing Administration is tightening up guidelines, the FHA streamline refinance is a better option than conventional refinances for homeowners. The FHA insures loans originated by approved mortgage lenders, which lowers the risks for lenders and opens doors for borrowers.
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