If you have an FHA loan now, but it’s an ARM, you probably worry what will happen when it adjusts. Why wait to find out? You can refinance your loan with the simple FHA Streamline program.
The FHA Streamline program requires very little verification yet is a robust program for those with a current FHA loan.
Keep reading to learn the benefits of this loan program and how you can apply.
What is the FHA Streamline Loan?
First, let’s look at the FHA Streamline loan’s requirements. You do not have to provide any of the following:
- Credit score verification
- Income verification
- Asset verification
- Home valuation
What you do need to provide is proof of a timely mortgage payment history. Each of your last 12 payments must have been on time. If you have one 30-day late payment, it may be allowed, but it depends on the lender.
The FHA determines your eligibility on this factor alone. They want to know that you can afford your previous FHA payment easily. If you could, then you can likely afford the new payment on the streamline refinance because the payment should be lower.
The Net Tangible Benefit
Aside from the mortgage payment history, the FHA requires that you have a net tangible benefit. When you’re talking about a fixed rate loan to a fixed rate loan, chances are the payment will be lower. What other reason would you have to do a rate/term refinance if you can’t get a lower rate, right?
Here’s where it gets tricky. If you have an ARM right now and want to refinance into a fixed rate, your payment may not go down. In fact, it may increase. That’s because you probably had a teaser rate for the adjustable rate loan. If the rate hasn’t adjusted yet, you probably have a pretty good rate. The fixed-rate may be higher, but more stable in the end. Luckily, the FHA considers a refinance from an adjustable rate to a fixed interest rate a tangible benefit.
The Fine Print
So you know you have a timely mortgage payment history and you want to refinance your ARM into a fixed-rate. It seems like you have all of your ducks in a row. Here’s where it gets tricky. Remember, the FHA doesn’t require lenders to verify your income. But, you are able to take a higher loan payment if the interest rate increases on the fixed-rate loan. How do they know you can afford it?
The FHA set a threshold of 20%. If your payment doesn’t increase more than 20%, you are good. You don’t have to verify anything and you can use the streamline loan benefits. If it increases more than 20%, though, you may find yourself not eligible for the streamline loan. Instead, you’ll need to use the standard FHA refinance. You’ll have to verify all aspects of your loan application, just like you did with the home purchase.
Paying the Upfront Mortgage Insurance Premium
Don’t forget, if you take out a new FHA loan, you’ll pay the upfront mortgage insurance premium all over again. However, you do get a break, if you took the original FHA loan out within the last 3 years. You may be eligible for a small refund of the money you paid if this applies to you.
The FHA prorates the refund based on the amount of time that has passed. For example, after 6 months, which is the first opportunity to use the program, you’ll get 70% of the premium paid back. After 36 months, though, you’ll get 10%.
The money you get back goes directly toward the new upfront MIP you owe with the onset of the new loan. This helps to lower the amount of money you must bring to the closing.
Converting your ARM to a fixed-rate FHA loan is easy with the streamline program. As long as you still live in the property and you have a net tangible benefit, you’re in good shape. If you know you want to get out of an adjustable rate mortgage in the near future, make sure you watch your mortgage payment history. Make your payments on time so that when the time comes, you are eligible for the streamline program.