The FHA Streamline Refinance has many benefits. The most obvious is the chance to lower your payment without a credit check or appraisal. A benefit you may not be aware of though is the opportunity to eliminate mortgage insurance. The date of your refinance will determine if this is actually the case for you. If it is not, do not worry, there are still ways to get rid of this insurance, which often becomes lifetime insurance for some borrowers.
What is the FHA Streamline?
The FHA Streamline program is a simple refinance program. You must currently have an FHA loan in order to use it. If you do, it enables you to refinance when rates lower or you want to use a different program. A few examples include:
- Johnny took out an FHA loan to purchase his home at an interest rate of 5%. Today, rates decreased to 4%. Johnny could apply for the FHA Streamline Refinance because there is a benefit to the refinance – he would have a lower payment.
- Joe took out an FHA loan to purchase his home at an interest rate of 4%, but it was an adjustable rate loan. Joe is through the introductory period, which means his rate is about to adjust. He can apply for the FHA Streamline program and refinance into a fixed rate loan.
Both scenarios allow the borrowers to refinance with very little verification. They do not need to provide proof of their income, assets, credit, or the value of their home. Even if they are upside down on their home (they owe more than it is worth), they can refinance. This is one of the benefits of the FHA loan.
FHA Loans Originated Before June 2013
The benefits get even bigger for a certain group of borrowers. Those who originated their FHA loan prior to June 3, 2013 are able to not only refinance with the streamline program, but also save money on their mortgage insurance. Borrowers who meet the following guidelines will be eligible:
- You did not default on your loan (it is in good standing)
- You originated it prior to June 3, 2013
- You have made at least 5 years’ worth of payments if you have a 30-year loan
- Your current loan-to-value ratio does not exceed 78%
*If you have a 15-year loan, there is not a minimum number of payments you must make to qualify, but all other stipulations still apply.
You can prove the current value of your home based on the latest appraisal. Usually this means the purchase appraisal, but if you had one more recent than the purchase, you can use it. If you meet these requirements, you may request cancellation of your mortgage insurance.
The downside is the length of time it takes to get to a 78% debt ratio. In most cases, it takes between 10 and 12 years to get to that point. However, knowing that you can cancel the MI, which can save you hundreds of dollars each month, makes it worth working towards your goal.
Other Options to Eliminate Mortgage Insurance
If you originated your FHA loan after June 3, 2013, you are not eligible to cancel your mortgage insurance. This means you pay it as long as you hold the loan. If you keep it the entire term, that means 30 years of mortgage insurance or thousands of dollars! If you are not eligible for the FHA Streamline approach to remove mortgage insurance, you have another option – a conventional loan.
You might think you are not eligible for conventional financing and that is why you took out an FHA loan in the first place. However, if it has been many years, you might be surprised to learn you are eligible. Conventional guidelines are not that much stricter than FHA guidelines. Once you take out your FHA loan, strive to make the following happen:
- Increase your credit score – Conventional loans usually require a credit score of at least 680 in order to qualify. Chances are you had a lower score at the time of your purchase if you took out an FHA loan, since they allow scores as low as 580.
- Decrease your debt – FHA loans have a higher threshold for debt. Their maximum debt ratios equal 31/43. Conventional debt ratios require ratios no higher than 28/36. If you work on paying your debt down or off, you can meet the conventional guidelines.
- Pay your principal balance down – Whenever you can, try to make extra payments towards your principal. Even an extra $100 per month can help pay your loan down faster. The quicker you get the balance down, the easier it will be to refinance into a conventional loan.
The best case scenario would be to wait until you owe less than 80% of the value of your home. This way you never have to pay Private Mortgage Insurance when you pay off your FHA loan with a conventional loan. If that is not possible, though, know that you can cancel your Private Mortgage Insurance once you owe less than 80% of the value of the home.
Canceling your FHA mortgage insurance with the FHA Streamline Refinance is the easiest way to go about the process. This is only because you do not have to verify any aspects of your loan. Some lenders might request your credit score or ask to verify your employment, but that is about the extent of it. Refinancing into a conventional loan means you must go through the approval process all over again. It is not the end of the world to go through the process, but it takes more time. Conventional loans often have higher closing costs as well. However, if you eliminate annual mortgage insurance and avoid paying upfront mortgage insurance, you come out the winner in the end. Go over your options with a few lenders to see which would be the best way for you to eliminate mortgage insurance on your loan and start saving!