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FHA Streamline Refinance | Guidelines, Pros & Cons – 2016

5  FHA Streamline The US economy is going through a very rough patch.

The ongoing housing crisis has made a majority of the US population think that it had never ended in the first place.

They live in a time where it costs more to pay rents than own a house and sadly a majority of them are unable to do either. A large populace still believes that the worse is yet to come.

It is in times like this that the Federal Housing Administration (FHA) has a key role to play.

During the banking crisis of the 1930s refinancing was not an option and borrowers couldn’t clear their loans. In 1934 the federal banking structure was revamped and the National Housing Act introduced the FHA. The main aim of this rule was to decrease the down payment and to regulate monthly payments thereby making housing more accessible to all.


What exactly is FHA loan?

In simple terms it is loan insured by the FHA that a lender can offer a borrower without fear. The FHA protects the lenders from defaulters. Since the lenders’ losses are covered, they offer better interest rates and require low down payment. The FHA loans are popular with borrowers for the above reasons and for the flexible qualifications required to apply for a loan. Only FHA approved lenders can issue these loans.

The FHA provides various options to borrowers to either purchase a new house or refurbish the old and also refinance a loan. Here we shall look at the types of FHA Loans and FHA refinancing options.

 

What are the various types of FHA loans?

There are various FHA programs that cater to a variety of situations faced by borrowers. Given below is a table which puts everything in a nut shell.

 

TYPE OF LOAN

WHO  BENEFITS

·        Fixed rate FHA Loan

·        Those who want to buy a house but don’t have money – college grads, newlyweds.

 

·        Adjustable Rate Mortgage(ARM)

·        Low and moderate income families wanting to own homes.

·        FHA Secure Refinance Loan

·        Helps those with looming foreclosure because of changing interest rates.

·        FHA Reverse Mortgage

·        Benefits citizens above the age of 62 by converting home equity to income or Line of Credit.

·        Energy Efficient Mortgage

·        Current and future home owners who adopt energy saving improvements. These changes also reduce the monthly utility bills.

·        Graduated Payment Mortgage

·        Low to moderate incomes who foresee increase in their incomes in the coming 5-10 years.

·        Growing Equity Mortgage

·        Helps those who expect an increase in their income and so the payments too will increase with time.

·        FHA Loans for Condominiums

·        Helps those who buy units in condos.

 

What is FHA Refinance Loan?

Refinance means to secure a new mortgage to clear the previous loans. This will reduce the interest rates and the monthly payments allowing more liquid cash in your hand for other purchases. People opt for refinancing when they know the value of their house is more than the mortgage value or in other words when there is a home equity.

Why should you opt for refinancing?

With a dismal economic situation, it is necessary that you wise up to the financial scenario and not leave any opportunity to save money. Refinancing your mortgage is a sensible way of saving several thousand dollars which you would have otherwise paid as interest and down payment. Here is another opportunity to manage your mortgage better so that you have sufficient funds for all your needs and necessities with some to spare.

5 does fha streamline require a credit checkWho can apply for FHA refinance loan?

Anyone can apply for a FHA refinance loan; your original mortgage need not be a FHA loan for you to qualify. This loan too is similar to the standard refinancing loan but for the fact the loan is insured by FHA.

Do you know the purpose for refinancing?

Whenever you consider refinancing as an option to tide over difficult times you should be aware of the purpose for refinancing. Normally people opt for refinancing because:

  • They want to lower the interest rate on the present loan. This way they can save money and reduce the monthly payments.
  • They can reduce the term of the loan thereby clear their debt faster.
  • They can cash in on changing interest rates and converting adjusting rate mortgage to fixed rate mortgage. This way they can reduce their monthly payments and make some savings.

What are the different kinds of FHA Refinancing Loans?

Once your purpose for refinancing is clear you can decide on the type of refinancing that will most suit your needs. There are two types to choose from:

  • FHA Cash Out Refinancing Loan
  • FHA Streamlined Refinancing loan.

What is FHA Cash out Refinancing Loan?

When the loan amount is far greater than the remaining mortgage value of your house it is called a Cash Out Refinancing Loan. The advantage of this loan is that you will have enough cash in hand to meet any of your other needs and demands. You can avail this loan only if your original mortgage is a FHA loan. With a good home equity this loan will be helpful for a kid’s college education or even for renovating your home.

What is FHA Streamlined Refinancing Loan?

A streamline refinancing loan is a loan which is not dependent on your credit scores, income, and employment status and requires minimal paperwork. Basically the loan process is streamlined for a smooth progress from the application stage to the approval stage. Only present FHA loan holders can avail this type of loan.

What are the Streamline Refinance guidelines?

Some of the very basic guidelines that have to be adhered to in streamline refinancing are:

  1. Only a FHA insured mortgage can be refinanced – If your original mortgage is FHA insured then you can avail this option.
  2. Only a present mortgage can be refinanced – Only if your mortgage is current and you are have not defaulted are you eligible.
  3. Net Tangible Benefit: The borrower should have a net tangible benefit which in turn is subject to the type of loan for refinancing and the interest rate of the new loan. Streamline Refinance applicants should prove the legitimacy of the refinancing.
  4. When you use the streamline refinance program you cannot take cash out over $500 on the mortgage.
  5. There is no need to verify the employment status of an applicant.
  6. The financial status of the applicant need not to be subject to scrutiny.
  7. Credit score verification is not needed when you apply for FHA Streamline Refinance.

Who is considered FHA Streamline Refinance Eligible?

You can consider yourself eligible if:

  • You have a current FHA mortgage
  • If you bought your house before June 1 2009
  • You have made regular mortgage payment in the last 12 months.
  • You hold a perfect 3 month payment history- No later than 90 day payment history is required.
  • One mortgage late payment is allowed in the last 12 months. Loans must be current at the time of closing.
  • Your monthly mortgage percentage reduces by 5% minimum of the total payment from the current payment schedule.
  • You should not have applied for refinance in the last 210 days meaning there should be a gap of almost 7 months before you apply for refinancing.
  • A minimum of 6 mortgage payments must have been made on the exiting FHA loan.
  • Your FICO score should be 620 or higher. You remain eligible even with a lower credit score of 500, but the above limit is to ensure that you remain eligible for future loans.

 

When you meet all the above criteria you can be considered FHA streamline refinance eligible.

[PDF]CONSUMER FACT SHEET for FHA Short Refinance – HUD

5 is fha streamline refinance a good ideaWhat does employment not verified mean?

It means exactly what it says in the sense that the FHA is not interested in knowing whether you are employed or not. The streamline process does not require any proof of tax returns, income slips. If you meet all the other criteria you can still avail a refinance loan. In the same vein, your income is not verified before a loan is approved.

 

What are the Pros & Cons of a Streamline Refinance?

The ease with which one can avail the FHA Streamline Refinance loan has made it immensely popular with the masses.  Like with all good things, this program too has its own advantages and disadvantages.

Advantages:

  1. No Credit score required: Those with less credit scores too can qualify for loan.
  2. No Appraisal needed: Even if your home value is less than the loan amount you do not need an appraisal. The lender will invariably use the first appraisal value even if your home’s value has dropped since then. This way you save a few hundred dollars on appraisal costs.
  3. Reduced Processing Time: Since appraisal and required paperwork is out of the picture the processing time is drastically cut.
  4. Need to do only basic repairs like removing lead paint from the house and no major repair work need be taken.
  5. Lesser monthly payments: Because of lower interest rates your monthly payments too will be significantly less leaving more liquid cash at your disposal.
  6. There is no verification of job or income required for you to be eligible for refinance unlike conventional refinance programs.
  7. In the event of a divorce, you can remove the name from the title deed thereby proving you are the sole owner of the property. Before that you have to prove that you can clear the debt solely and are not dependent on the estranged partner.

The Streamline refinancing is beneficial for FHA and the borrowers alike. FHA benefits because it can create a money pool while the borrower’s benefits by paying lower monthly payments. This method also ensures that loan defaulters are few.

Disadvantages:

1.      No Cash out: With the FHA streamline Refinancing you cannot cash out on the home equity to clear some other debt.

2.      You cannot default: To utilize the FHA streamline refinance program u must be up-to-date with your mortgage loans.

3.      Costly closing costs: Closing costs often involve the transaction fee to the lender, the documentation fee and the administrative fees.  This often adds up to a substantial amount. You can consider zero cost FHA streamline refinance; the interest rates will be high though. As a result you must be sure that refinancing is a better option when compared to conventional mortgage.

Why is FHA streamline Refinance a smart program?

The main motive of the FHA is to insure mortgages and not make new ones. The simplified guidelines ensure that even unemployed with zero income, no home equity and terrible credit score are eligible for a loan. On top of that the absence of appraisal and the minimal paperwork involved ensures that the borrower is not waiting for a long time for the loan to reach his hand making it a popular choice.

These changes to the conventional mortgage system have been made to make sure that the risk involved is minimized. With minimal monthly payments and the thought of saving thousands over the long run, the borrower will tend to make the payment and not default. This in the long run is beneficial to the economy staggering under the mortgage crisis.

Is FHA Streamline Refinancing worth it?

Finally, you need to ask yourself the question if streamline refinancing is really worth it? Does it serve the purpose you opted for in the first place? Will you get the benefits that you think you can from refinancing? All potent questions which need to be answered before you consider refinancing as an option to your mortgage woes.

Having said that, with each passing year the mortgage crisis is worsening and respite is not in sight.  The unstable economy and the fluctuating interest rates make it tougher to make payments on time. At such times streamlined refinancing does seem to hold the beacon to a better future which is free of debt.

But remember that without proper knowledge about refinancing you might do more harm than good to your financial status.  It is definitely the easiest but you need to decide if it is the best option for your predicament. It is always prudent to look around for other loan options when you have home equity issues.

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