FHA Streamline Refinance: How It Works
Do you have an FHA loan and thought about refinancing but you didn’t apply because you thought there was something that had changed since you were first approved that might keep you from getting your FHA refinance application approved? Things can change over time and someone’s application status can also. When lenders first review an FHA application they’re required to follow FHA lending guidelines along with federal regulations. For example, FHA loans ask or a down payment at least 3.5% of the sales price of the property. There are also closing costs involved with FHA loans. Lenders ask for recent bank statements showing sufficient funds to close that will cover the down payment, closing costs and a little left over called “cash reserves.”
Lenders will also review a credit report and pull credit scores. To make sure the borrowers can afford the home being financed, they will verify income by reviewing copies of recent pay check stubs covering a 30 day period along with the last two years of W2 forms. For someone that is self-employed, two years of federal income tax returns will be required.
Approved FHA lenders actually make two separate approvals, one for the borrowers and one for the subject property. The property is evaluated by reviewing a new property appraisal. The appraisal will justify the sales price of the home by comparing recent sales of similar homes in the area. But when refinancing, FHA offers the “streamline” refinance option and most every FHA refinance qualifies for the streamline refinance. What is so special about the streamline?
First, there is no verification of income of the applicants. That’s right. No verification of income. This means no pay check stubs, no W2 forms and no copies of federal income tax returns are needed. There is no appraisal required for the streamline option. This means if someone believes they are “underwater” and they owe more on their home that it is currently worth, the absence of an appraisal solves that issue. Interest rates are extremely competitive with an FHA streamline refinance as well.
With the FHA streamline option, the monthly payments must drop by at least 5.0% or the borrowers are switching from an FHA hybrid to the stability of a fixed rate loan. The streamline option is also only for an FHA to FHA transaction. As it relates to credit, lenders ask there be no payments within the past three months be more than 30 days past the due date and only one such payment over the past year.
If you have an FHA loan but didn’t apply for a refinance due to any of these reasons, it might still make sense to make the switch. Rates are still relatively low and you might very well be able to qualify even if you feel you can’t. Let your loan officer help walk you through the process.