The FHA offers several programs that many borrowers don’t know about. The two most commonly misunderstood are the FHA Streamline and the FHA Short Refinance. Both programs have many benefits. But, they each pertain to a different audience. We’ll discuss each program below and how you can qualify for them.
What is the FHA Streamline?
The FHA Streamline refinance is for current FHA loan customers. It offers these homeowners the ability to refinance their current FHA loan. Homeowners don’t need a new appraisal for this program. They also don’t need to verify their credit or income. The loan is supposed to provide borrowers with a lower mortgage payment than they have now. It doesn’t matter if the homeowner is underwater (owes more than the home’s value) or not. The largest issue is if there is a net tangible benefit for the refinance.
What is the FHA Short Refinance?
The FHA Short Refinance is another FHA program but it’s for borrowers that don’t have an FHA loan. It’s also reserved for borrowers who are underwater on their mortgage. Owing more than the value of their home makes it difficult to refinance. The FHA program makes it possible with the help of the homeowner’s current lender, though.
How to Qualify for the FHA Streamline
Qualifying for the FHA Streamline depends on your housing payment history. The FHA uses your payment history as the determination of your eligibility. If you’ve owned the home for more than 12 months, you must have no more than one late payment in the last thirty days. If you’ve owned the home for less than 12 months, you must have on-time payments for the entire time you’ve owned the home.
Lenders do not need to pull your credit or determine the value of your property. If you have a timely payment history, you can refinance the outstanding principal balance of your loan. You can also include any interest and upfront mortgage insurance due. You then subtract any upfront mortgage insurance refund you are eligible to receive. We discuss this below.
The FHA provides current FHA homeowners with a refund of a portion of their upfront mortgage insurance in some cases. You must refinance within the first 3 years of taking out your loan in order to qualify. You must also make six payments on the loan before you are eligible for the refund. Starting at month 7, you may receive 68% of the insurance premium you paid as a refund. Each month the refund decreases 2% until the 36th month with a 10% refund. The FHA deducts the amount of the refund from the mortgage insurance you owe on the new loan.
How to Qualify for the FHA Short Refinance
The FHA Short Refinance is a program selectively available to borrowers without an FHA loan. In order to qualify, you must be underwater on your home and not have an FHA loan. In addition, you must be current on your existing mortgage. The program wasn’t created to help borrowers who are behind on their mortgage. Instead, it helps those who can’t refinance because their home’s value dropped. If you are behind on your mortgage, your lender may allow you to take part in a 3-month trial payment plan. After you prove you can make the payments, the lender may provide the short refinance.
A caveat that is often difficult to make happen is the agreement of your current lender to write off 10% of your principal balance. This makes the short refinance a process between your old and new lender. It is not an automatic approval. Your current lender does not have to agree to write off the principal. If they do agree, your new FHA loan can’t exceed 97.5% of your home’s value. If you have a 2nd mortgage on the property, your combined loan-to-value ratio can’t exceed 115% of the home’s value.
In addition, standard FHA loan requirements apply. The one exception is the FHA requires a credit score of at least 500. Some lenders may require higher scores, though. They are able to add their own requirements onto those required by the FHA to make the loan safer for themselves. You must also have steady income, stable employment, and debt ratios around 31/43% in order to qualify.
The Main Differences
As you can see, the FHA Streamline and Short Refinance are for different borrowers. You can’t be eligible for both programs. You are either a current FHA customer and qualify for the streamline program or a non-FHA customer who qualifies for the short refinance.
Beyond that, the loans are the same. You get an FHA insured loan. This means the FHA guarantees your loan for the lender. If you default on it, the FHA pays the lender back a portion of what they lost. In order to do this, though, you’ll pay mortgage insurance. You pay it for the life of the loan. It does not go away when you owe less than 80% of the value of the home.
In both cases, though, you get a great loan program with low interest rates. Generally, FHA loans also have low closing costs. If you are upside down on your home, it’s a great way to get ahead. The most likely candidates for the program are those who can lower their interest rate. Saving money every month can help you get ahead. If you are ahead financially, you can use the savings to pay your principal down. The extra payments can help knock a few years off of your principal payback. It also helps lower the total amount of interest you pay. Even if you knock 5 years off your mortgage, you can save thousands in interest. Don’t focus only on the present; look at the big picture. See what you can save in the future as retirement is down the road. Even if you are young, it’s never too early to start thinking about how you can get ahead. The FHA streamline or FHA short refinance are both great ways to get you ahead.