The FHA Streamline Loan is a program for existing FHA borrowers. Technically, the program does not require you to undergo a credit check. However, there are certain circumstances that may require a lender to look at your score.
We go through the various circumstances below.
The Non-Credit Qualifying FHA Streamline Loan
The most beneficial way to use the FHA Streamline program is for a lender to use your qualifying factors used for your current loan for the new loan. This only works if you refinance your outstanding principal balance and nothing else. You cannot receive any cash out of the equity of the home or pay off any existing debts. In addition, you must prove there is a benefit for the refinance. In other words, you save money or reduce the risk level of your current loan.
Following is the most common ways you can show a net tangible benefit:
- Secure a lower interest rate compared to your current FHA loan – This should result in a lower monthly payment since you’ll pay less interest. Saving money every month is a benefit in the eyes of the FHA.
- Refinance from an adjustable rate loan into a fixed rate loan – A fixed rate provides more predictability and a lower risk of default than an adjustable rate. Even though you might not save money each month, the predictability is seen as a benefit.
- Shorten your loan term – A shorter term reduces the risk of default since you borrow the money from the lender for a shorter period. Again, you probably won’t save money, but the shorter term is a lower risk.
If you can prove to the lender that there is a benefit for the refinance, they may use that in place of a credit report. This is only true if you have made at least six payments on your current FHA loan, though. You must also prove that you made your current FHA payments on time.
A Credit Qualifying FHA Streamline Refinance
Not all situations allow borrowers to skip the credit qualification portion of the streamline refinance, though. Even if you have a current FHA loan with no late payments in the last twelve months, there are two specific situations where credit verification may be required:
- If your payment increases more than 20% – Some refinance situations result in a higher monthly payment, such as refinancing from an ARM to a fixed rate. If your payment increases more than 20%, the lender must make sure you are a good credit risk.
- If you delete a borrower from the loan – With FHA loans, deleting a borrower from the loan during a refinance triggers the due-on-sale clause. You will need to qualify for the loan on your own using your credit score and income information to qualify for the new loan on your own.
The Lender Overlays Play a Role
Even if you fall into the category that allows you to skip the credit verification for an FHA streamline loan, you still may find a lender that pulls your credit. It’s called lender overlays. The lenders fund FHA loans. The FHA simply guarantees the loans. This means the lender puts up the money for the loan with the promise of being repaid should the lender default.
Since the lender is at immediate risk, they often add their own requirements to a loan. This doesn’t mean every lender requires a credit check on a streamline loan, but many will require it. They do so because your credit tells them your level of financial responsibility. Since FHA loans allow low credit scores to begin with, lenders often want to make sure your credit score is at least the same as it was during your original application, if not higher.
Lenders put themselves at risk when they lend you money even on an FHA streamline refinance. If you default on the loan, the lender loses out on the interest you were to pay and may even lose a portion of the principal they lent you. If a lender requires that they pull your credit for an FHA streamline, it’s just to protect themselves. If you want to avoid a lender from seeing your lower credit score, you may have to shop around for a lender that doesn’t have any overlays.