What is an FHA Streamline Refinance, and how does it work?

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In a Nutshell

An FHA Streamline Refinance allows people with FHA loans to lock in lower rates or shorter terms with a simpler process than a traditional refinance requires.
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If you have an FHA mortgage, there’s a simple way to refinance your loan: the FHA Streamline Refinance.

FHA loans are a popular choice for first-time homebuyers, offering low down payments along with credit score requirements that are a bit less stringent than conventional mortgages.

If you have one of these mortgages, an FHA Streamline Refinance might be a good option to help you take advantage of lower interest rates or pay off your mortgage more quickly. This refinance program allows you to replace your current mortgage with a new FHA loan without going through all the hoops of a traditional refinance.

Here’s what you need to know about how an FHA Streamline Refinance works.

How does an FHA Streamline Refinance work?

An FHA Streamline Refinance gives people who already have an FHA mortgage the chance to reduce their monthly payment or get a better interest rate without a ton of paperwork. You won’t need to have your home appraised to qualify for this refinance (unless your lender requires it), saving you time and money.

In addition to meeting standard FHA loan requirements, you must …

  • Currently have an FHA mortgage
  • Have had your mortgage for at least six months
  • Be up to date on your mortgage payments for the last 12 months, or at least six months if haven’t had the mortgage for a full year
  • Benefit from a refinance
  • Not take out more than $500 in cash during the refinance

Credit-qualifying vs. non-credit-qualifying refinances

There are two main types of FHA Streamline Refinances: credit qualifying and non-credit-qualifying.

The non-credit-qualifying refinance is the simpler of the two and doesn’t require a credit check. You can use the non-credit-qualifying option if all of the borrowers on your mortgage will remain the same.

The main difference with the credit qualifying refinance is that your lender will need to pull your credit report. You might also need to provide documentation of your income so your lender can calculate your debt-to-income ratio and determine if you can afford the mortgage. You’ll likely have to go this route if you’re removing a person from the mortgage during the refinance.

What are the benefits of an FHA Streamline Refinance loan?

To qualify you for an FHA Streamline Refinance, your lender must show that you’ll get a “net tangible benefit” from the refinance — so there’s some assurance that an FHA Streamline Refinance will be helpful in some way to those who qualify.

The benefit could be a reduced interest rate, moving from an adjustable-rate mortgage to a fixed-rate mortgage, or getting a shorter loan term that allows you to pay less in interest over the life of the loan.

For example, if you’re moving from a fixed-rate loan to a new fixed-rate mortgage, your new loan must have an interest rate at least 0.5 percentage points lower than your existing FHA loan.

Just like with any refinance, when you use an FHA Streamline Refinance to get a lower interest rate, you generally have a lower monthly payment. If you refinance from an adjustable-rate mortgage to a fixed-rate loan, you’ll gain the stability of a set monthly payment for the remainder of your loan. And if you refinance to a shorter loan term, you’ll stand to build equity more quickly and pay less in total interest.

Overall, the process around an FHA Streamline Refinance compared with other refinance loans is the speed and ease of the process. You also generally save money in fees because an appraisal is not typically required. With most refinance loans, you’ll need all the same types of documentation as you need when you’re buying a home. Not so with an FHA Streamline Refinance. In most cases you won’t need to get an appraisal on your property, and your lender may not even need to pull your credit.

Do I have to pay closing costs on an FHA Streamline Refinance?

Yes, generally you must pay closing costs with an FHA Streamline Refinance. This may include a lender origination fee, insurance costs and the FHA mortgage insurance premium.

The only exception is if your lender agrees to charge you a higher interest rate in exchange for covering your closing costs. The FHA doesn’t allow lenders to roll a homeowners’ closing costs into a new mortgage loan.

Should I get an FHA Streamline Refinance?

If you currently have an FHA loan, an FHA Streamline Refinance could be right for you. Here are a few questions to ask yourself before applying to refinance your mortgage.

  • Have interest rates fallen? Refinancing works best when interest rates have fallen significantly lower than they were when you originally took out your mortgage. Look at some current rate quotes and see how they compare to the interest rate on your home loan.
  • Has my financial situation improved? If you have a higher credit score now than you did when you took out your mortgage, you might also qualify for a better rate.
  • Do I want a conventional loan? An FHA Streamline Refinance isn’t your only option. You may qualify for a conventional refinance loan, so it’s worth at least running the numbers.
  • Can I afford the mortgage insurance premium? Part of your closing costs for an FHA Streamline Refinance will include an upfront mortgage insurance premium, typically worth 1.75% of the total of your mortgage. This would be about $3,500 on a $200,000 mortgage.

Calculate your FHA loan

Find out how much your monthly mortgage could be with our FHA loan calculator.

About the author: Andrew Dunn is a veteran journalist with more than a decade of experience as a reporter and editor at North Carolina news organizations, including the Charlotte Observer and the StarNews in Wilmington. In those roles,… Read more.