The low doc loan requires fewer documents than a standard loan. It’s usually offered by a subprime lender that will keep the loan on their books. However, the FHA streamline loan can be viewed as a similar type loan. There’s a catch though – it’s only for current FHA customers.
If you have an FHA loan, read on to see how you can benefit from the FHA streamline program.
What is the FHA Streamline Loan?
Current FHA borrowers can refinance their FHA loan with little documentation. You don’t need to verify your home’s value, your income, or your assets. It sounds like the perfect loan!
The program is for borrowers that want to lower their interest rate/save money. It’s not for those who want to tap into their home’s equity. It’s also not for those who have not consistently paid their current FHA loan.
The only verification the FHA requires is proper housing history payments. If you’ve held your FHA loan for less than 12 months, you can’t have any late payments. If you’ve held your FHA loan for more than 12 months, you can’t have more than one 30-day late payment. However, the last 3 payments right before the application date must have been on time.
The only other requirement is that there is a net tangible benefit for the refinance. In other words, that you save money. Technically, they want to see you save at least 5% on your monthly payment. However, you can refinance from an ARM into a fixed rate and have a slightly higher payment. You can also cut the term of your loan down from 30-years to either 20 or 15 years.
If you do change the term or type of loan, your payment can’t increase more than 20%. If it does, you no longer qualify for the low doc loan. You would have to fully verify all aspects of your loan application.
How Does it Compare to a Low Doc Loan?
The FHA streamline is very similar to a low doc loan. You have to provide the lender with very little paperwork.
You’ll need your original mortgage note from your FHA loan along with your HUD-1 Settlement Statement. You’ll also need to provide your current mortgage statement. This lets the lender see if you are current on your payments. It also provides them with contact information so they can order a Verification of Mortgage.
The only other document you might need to provide is 2 months’ of your bank statements. If you owe money for closing costs, you’ll need to source the funds. The lender must have at least 2 months of your bank statements to show the money belongs to you and isn’t another loan.
A Step Above the Low Doc Loan
Something that the FHA loan doesn’t require that a low doc loan does is a credit score. The lender for the FHA streamline doesn’t have to verify your credit score. They are able to use the original score you used for your original FHA loan.
The FHA streamline loan also doesn’t require an appraisal. They can use the original appraised value of the home. This means borrowers that are underwater can even refinance their loan without a problem. This is unlike any other loan. Even loans that require little documentation need proof of the home’s value.
The FHA relies on the fact that you have been able to make your current mortgage payments on time. They assume if you can afford the higher payments, that lower payments will be even more affordable. This is how even underwater homeowners can take advantage of the program.
What You Can’t do With the FHA Streamline
The uses of the FHA Streamline loan are limited, though. It’s for borrowers that strictly want to lower their interest rate and/or payment. You can’t take cash out of the equity of your home. You can’t pay off other debts with it.
It’s strictly to put you in a better financial position. The FHA wants to make the home loan as affordable for you as possible. This helps you avoid default on your loan. Since the FHA guarantees the loans, they want to lower the risk of default as much as they can.
In order to provide you with this loan, though, the FHA does charge an upfront mortgage insurance premium again. Luckily, if you took out your original FHA loan within the last 3 years, you’re eligible for an MIP refund. Any upfront MIP you paid will be prorated based on the length of time you’ve held the loan. It starts after the 6th month, because the FHA requires you to wait 210 days before you refinance. The refund goes down incrementally every month until the 36th month where you receive 10% of your MIP back.
In the end, the FHA Streamline is similar to a low doc loan. You don’t need to provide very much documentation. But it has many different characteristics. Most importantly, it’s only for those borrowers that already have an FHA loan.
If you do have an FHA loan and want to save money, it’s a great program. Find a lender that offers you the lowest rate and best fees. This way you can maximize the savings you reap on the FHA streamline loan.