If you have an FHA loan now, you are in luck. You can refinance without an appraisal. Even better, you don’t need a minimum FICO score. The FHA does not require the lender to pull your credit! They don’t even require that you verify your income.
The only thing the FHA does require is proof of your timely mortgage payments. The length of time you need timely mortgage payments depends on how long you’ve had the loan. If it’s been less than 12 months, you cannot have any late payments reporting since you’ve had the loan. If it’s been longer than 12 months, you can have one late payment within the last 12 months. However, that late payment cannot be within the last 3 months. Each of these payments must be on time.
Why You Don’t Need a FICO Score
The FHA relies on your mortgage payment history alone. Your current FHA loan should have a higher payment than the intended refinance payment. The point of the FHA Streamline is to save you money. You should lower your interest rate or refinance into a less risky loan.
If you refinance from a fixed rate loan into another fixed rate, your interest rate must be lower. In fact, your total mortgage payment should be at least 5% lower. However, you can refinance from an ARM as well. If you refinance from an ARM to a fixed rate, your rate may increase. This means a higher payment. You still don’t need to verify your credit score or income. The exception is if your payment increases more than 20%.
If your payment does exceed the 20% threshold, you’ll have to verify your credit score and income. In other words, you must prove you can afford the higher payment. The streamline program doesn’t require verification because the new loan should have a lower payment.
The FHA allows you to refinance from an ARM. They also allow the refinance into a shorter term. Both transactions create a less risky situation for the lender. A fixed rate gives you a predictable payment. This usually reduces the risk of default. A shorter term loan is also less risky because the lender gets their money back faster.
Why Lenders May Pull Your FICO Score
The above rules are the FHA’s rules. The lender can have their own rules too. It’s called a lender overlay. The lender funds the loan. They are the one taking the risk. The FHA just guarantees the loan. They only pay the lender if you default on the loan and you go through the foreclosure process.
Many lenders still want to know your FICO score. They want to make sure are still financially responsible. Some lenders may have a minimum credit score they require. Others may just want to make sure you don’t have any recent late payments or collections.
It’s always a good idea to make sure your credit is in good shape before you apply for the streamline loan. You won’t know if a lender will pull your credit or not.
Other Factors of the FHA Streamline
The FHA streamline also doesn’t require income verification or a home appraisal. The FHA does this because of your timely mortgage payment history.
What this means is:
- You may have changed jobs
- You may make less money know
- Your home may have depreciated in value
- You may be upside down on your loan (owe more than the home is worth)
If the lender doesn’t verify your income or your home’s value, they will not know any of these items. Again, as long as you have a timely mortgage payment history, it won’t impact your approval.
The Benefits of the FHA Streamline
If you have an FHA loan now with a higher interest rate than you can get today, you benefit. You can refinance without any verification. However, you do have to pay closing costs. The best way to determine if it’s worth it is to determine your break-even point:
Determine how much money you would save each month. How much lower is the new payment versus what you pay now?
Total your closing costs. What will it cost you to close on the loan? Don’t forget about your new upfront funding fee. If you closed on your current FHA loan within the last 3 years, though, you can get a refund of the MIP you already paid. The FHA prorates the amount based on how long you’ve had the loan. If you refinance 6 months after your original loan date, you’d receive a higher refund than if you waited 35 months, as an example.
Once you know your closing costs, determine your break even as follows:
Total closing costs/Monthly Savings = Months to break even
Once you know the break-even point you can decide if the refinance is worth it. For example, let’s say your closing costs are $5,000. You save $150 per month on the new loan. Your break-even point would be 33 1/3 months or 34 months. If you don’t play to be in the home for more than 3 years, it wouldn’t be worth refinancing.
The FHA streamline offers many benefits. Most importantly, you don’t have to verify anything, including your FICO score. Talk to a few lenders before you apply to determine what they require. Some lenders may still pull your credit just as a precaution. If you have a reason to worry about your score, find a lender that doesn’t pull credit. Then you can maximize the benefits of the FHA streamline loan.