FHA Streamline Refinance: Pros, Cons And Rates

If you currently have an FHA loan and your goal is to decrease your monthly mortgage payments, you might want to consider an FHA Streamline Refinance. This type of refinance is intended to make the process as quick and easy as possible for those with an FHA loan.

Learning what an FHA Streamline is, how it works, and how its benefits can help you determine if it's the right option for you.

What Is An FHA Streamline Refinance?

The FHA Streamline Refinance is a mortgage refinance (or “refi”) product through the Federal Housing Administration (FHA) that can help homeowners with an existing FHA loan to lower their interest rate and reduce their monthly payment. An FHA Streamline can also be used to change your loan type. Specifically, you might be able to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.

As the name suggests, an FHA Streamline is a relatively speedy and simplified process. Some borrowers are even able to skip the appraisal before closing.

Pros Of An FHA Streamline Refinance

For homeowners with an FHA loan, an FHA Streamline Refinance is often the best type of refinance for their situation. Here are some reasons you might want to consider an FHA Streamline.

You Can Lower Your Monthly Payment

FHA Streamlines are a fast way to lower your monthly mortgage payment by locking in a lower interest rate. However, the FHA has strict guidelines regarding how you achieve the lower payment.

For example, you can’t add more than 12 years to your loan term. If you do extend your loan term to lower your payment, you must also reduce your interest rate. The exception is if you’re going from an ARM to a fixed-rate mortgage.

You Can Refinance Even If You Owe More Than Your Home Is Worth

Unlike many mortgage refi options, an FHA Streamline allows you to refinance even if you have an underwater mortgage, meaning you owe more on your home than it’s worth.

The loan amount for your FHA Streamline is primarily determined by the outstanding principal balance of your loan – so if your home value has declined, you may still be able to use an FHA Streamline to refinance.

Your Lender May Not Need To Verify Your Income Or Credit Score

The FHA Streamline Refinance comes in two forms. The type you qualify for determines whether your lender will require income verification and a credit check. Let’s take a look at the two Streamline refinancing options.

Credit-Qualifying Streamline Refinance

This type of Streamline refinancing requires you to provide income documentation. It also requires the lender to perform a credit check and calculate your debt-to-income ratio (DTI). If your refinance happens to remove a borrower from the mortgage, you fall into this type of refinance.

Non-Credit Qualifying Streamline Refinance

With this type of refinancing, your lender still checks your credit, but they consider fewer factors within your credit report. For a non-credit qualifying refinance, your lender may not need to verify your income. This makes the approval process faster and easier.

You May Not Need A Home Appraisal

A home appraisal is an unbiased and professional determination of the fair market value of the home. However, FHA Streamlines generally don’t require an appraisal of the home. Instead, the loan amount is determined by what you owe on your existing FHA loan instead of the current home value or loan-to-value ratio (LTV).

You Can Typically Close Sooner

Because you’re not required to provide as much documentation – and because a home appraisal isn’t usually required – the underwriting process is faster. The upshot is that your Streamline Refinance can close even sooner.

Cons Of An FHA Streamline Refinance

You should also be aware of certain trade-offs before taking out an FHA Streamline Refinance. Let’s look at some considerations.

Closing Costs Are Required

As with most refinance options, the FHA Streamline Refinance requires the borrower to pay closing costs, which can’t be wrapped into the new loan.

However, your closing costs may be lower because you likely won’t have to pay for an appraisal or credit check. Some lenders will even agree to pay your out-of-pocket closing costs – and charge you a slightly higher interest rate in exchange.

Limited Cash Back Is Offered

FHA Streamlines only allow up to $500 in cash out. FHA Streamlines are intended to help you lower your mortgage payment, so if you’re interested in taking cash out, you’ll need to choose another refinancing option, such as an FHA cash-out refinance.

You Have To Pay Mortgage Insurance

You’re required to pay an annual mortgage insurance premium (MIP) and an upfront mortgage insurance premium (UFMIP) with both an FHA loan and an FHA Streamline.

When you first get an FHA loan, you pay MIP, which protects your lender if you default on your loan. You’ll continue to pay MIP when you refinance. If you’re looking to stop paying mortgage insurance, a conventional loan may be a better choice, depending on how much equity you have.

The only way to remove MIP is to convert your FHA loan into a conventional loan – for which you’ll typically need a credit score of at least 620 – and reach 20% equity in your home.

Today’s FHA Streamline Refinance Rates

Rates might be offered as a 5-year ARM (adjustable-rate mortgage), 15-year fixed loan or 30-year fixed loan. Either way, FHA Streamline Refinance rates change often and may differ among borrowers, so it’s wise to compare current refinance rates.

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