Cash 1 Blog
Fha Streamline Refinance Pros and Cons
A lot of us, including the author of this article, have an FHA backed mortgage. This kind of situation is rapidly becoming the norm in lower middle class America, and in the last few years following the housing crisis, the so-called 'streamline' process that helps a buyer get out from an underwater home ('underwater' being the term meaning you owe more on your house than it is worth) or refinance after a period of misfortune such as unemployment or prolonged illness. For the most part, the program has been a major success, enabling lower income homeowners to reorganize their mortgage into a more feasible arrangement, but there is talk that the FHA Streamline program may be coming to an end.
If you are someone with an FHA backed mortgage, it is important to look at the pros and cons of the program so you can make an informed decision as to whether the process is right for you and your situation. But before you investigate the process, you should have some information ready first:
- Know whether or not you have an FHA backed mortgage. Most homeowners know whether or not they do, but sometimes they can lose track of this information. Check your mortgage agreement that you signed with your lender. It will stipulate whether the mortgage is backed by the Federal Housing Authority.
- You must have made your mortgage payments on time and in full for at least 12 months with your lender.
- You cannot have refinanced your mortgage to buy a second home within the last 210 days.
- Your credit score must be at least 620. Some lenders will require a score of 680 or higher.
If you can answer in the affirmative to these guidelines, you should contact your lender to see if you might qualify for the FHA streamline process. However, there are pros and cons to the process itself, and it would be beneficial to you to be fully aware of these.
Let's start with the cons as a way of breaking the 'bad news first' as it were.
FHA Streamline Refinance Pros and Cons
- Closing Costs. While most closing costs can be included with the financing of the loan, that is actually prohibited in this case, and closing costs vary widely depending on your lender and your home's location. 3% is the average closing costs on a mortgage, or $3,000 per $100,000 borrowed. This factor alone can be prohibitive when looking to streamline your mortgage. If you still think the process would be beneficial to you, take a look at possible financial routes to come up with the closing costs,
- Mortgage Insurance. When you take out a new FHA loan (and this is what the streamline refinance process is considered; a new loan) then you must pay upfront on the mortgage insurance, even if you did so the first time around. Insurance on the previous loan will not carry over to the current loan. If your loan-to-value ratio is higher than 78% (this means if your loan is as much as 78% or higher than the value of your home), then you will be required to pay annual insurance premiums.
Advantages of Streamlining Your Federal Housing Authority Mortgage
- As mentioned earlier, you can streamline your mortgage even with bad credit. Though the minimum is 620, this is a good way to get yourself out of a bad mortgage situation even though your credit might not be perfect. If your credit score is 740 or above, take a look at conventional refinancing as it will actually be more of a benefit to you. Many people with lower income but good credit scores are not aware of this. Essentially, all means is that it's easy to qualify, and many potential borrowers don't bother investigating the streamline process because they assume they would never qualify.
- You don't need an appraisal. As is the case with conventional refinance processes, the FHA does not require an appraisal of the value of your home when utilizing the streamline process. There is a caveat to this however. Many lenders to require an appraisal, and appraisal costs are usually charged to you, so try to find a lender that will not require an appraisal; they are out there.
- Terms might actually be simplified. A streamlined loan swaps in a new interest rate and new terms that are simplified (or streamlined) and make things easier for all parties involved. This is a result of the process becoming overly complicated in the last few decades, and even the banks like the simpler terms of newer refinanced mortgages.
- If your loan is an older one, you may be able to get your insurance premiums lowered especially if you never needed to use the insurance in all that time. The most advantageous borrowers are those who took out their FHA loan before June of 2009, but even if your loan is a newer one, don't let that stop you from investigating the possibility of a streamline loan.
The bottom line is that there are solutions to your mortgage crisis, especially if you are 'underwater' in your home. Make sure you do your homework, and check out the answers you can find online. This can help you discovering what kind of advantages and disadvantages there would be in the streamlining process (nothing that we haven't talked about here, but the websites to go into much more detail and provide much more information. You should think of this article as a starting point, and not a comprehensive source of information on this subject).
Joseph Priebe takes pride in assisting audiences with his articles to help them make sound financial decisions.
With over ten years of experience writing financial content his goal at CASH 1 has always been creating engaging and easy-to-digest information for anyone searching for immediate or long-term monetary solutions.
When Joseph is not writing about personal finance, you can find him photographing the Southwest United States with his 4x5 Graflex Crown Graphic camera. He is based in Phoenix, Arizona.