By Hal Bundrick, CFP
An FHA streamline refinance offers you something you rarely get in the financial world: a bit of a shortcut, saving you time and money.
But not everyone can get it. Only borrowers who meet certain conditions can get a break when refinancing a home purchase loan that was originally backed by the Federal Housing Administration.
We take a look at the five strict conditions you need to know about if you want to score an FHA streamline refinance -- and one big bump in the road to this savings shortcut that you'll want to look out for.
How streamlined is it?
"We're already insuring the loan that is going to be refinanced, so this is about as streamlined as it gets," says Kevin Stevens, an FHA spokesman. "There is no income check required and no appraisal required."
Eliminating the income and credit verification and appraisal not only reduces time, hassle and paperwork, but also saves the extra fees, as well.
The reasoning is that the FHA has already valued the property, and most of the work it takes to get an FHA loan has already been done. So the do-over is not overdone.
The first 4 hurdles to clear
Of course, mortgages are rarely push-button easy. Here are four conditions you'll need to know about before beginning an FHA streamline refinance:
- You can't be delinquent on your current FHA loan. "We have [other] tools for borrowers who can't afford their payments," Stevens says.
- You can't take out more than500 in cash from the refinance.
- It must be at least six months since your current mortgage was issued.
- You can't increase your loan amount to cover closing costs.
The biggest requirement of all
There is a fifth -- and quite unusual -- stipulation.
"We do require that there be a benefit to the buyer," Stevens says. That means the FHA is looking for you to reduce your term or lower your mortgage interest rate -- or both.
The FHA used to mandate that a refinance simply provide a lower payment, but the agency realized that could result in a false economy. "While a [lower] payment itself could be beneficial, if you're getting there just by increasing your term, there is no net benefit because you're paying more," Stevens says.
The added costs of interest compounded over an additional number of years can significantly outweigh the advantages of a lower monthly payment. Using a mortgage refinance calculator can help you understand the financial trade-off between lowering your payment and adding years to your loan term.
While the FHA allows borrowers to increase their loan term by up to 12 years, it has to be offset by a rate reduction. "Otherwise it's not worth refinancing," Stevens says.
There is a catch
One potential downside to an FHA streamline refinance: You'll pay a fresh upfront mortgage-insurance premium and continue shelling out monthly premium payments.
In an FHA streamline refinance, you can wrap the upfront premium -- but no other closing costs -- into a higher loan amount as a part of the refinance -- as long as there is still a "net financial benefit" to the borrower, Stevens says. That means the numbers have to work in your favor, all costs considered.
The upfront premium is 1.75%, except for FHA loans originated before April 2009; those require an upfront premium of only 0.01%. Monthly premium payments vary according to the loan amount and loan-to-value ratio, which is determined by dividing the loan amount by the home's purchase price.
Tips to maximize your FHA streamline refinance
As always, it pays to comparison shop with different lenders. Just because the FHA guarantees your loan doesn't mean every lender's terms will be the same.
Mortgage lenders often add "overlays" -- additional costs and requirements to FHA loans. For example, a lender may require a credit report on an FHA streamline refinance, even though the FHA doesn't.
And Stevens offers another word of advice: Calculate your own long-term savings.
"Just because [a refi] meets our 'net tangible benefit analysis' doesn't mean it is for sure in the best interest of that individual consumer. They are still going to have to make that choice on their own," he says.
Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org. Twitter: @halmbundrick.