You have an FHA loan that you want to refinance in order to get a lower payment. The only problem is that you have bad credit. How will you ever refinance?
You can use one trick that the FHA provides. It’s called the FHA streamline loan and it allows you to refinance your FHA loan without verification of your credit. You can even have poor credit and still refinance your loan.
How Does the FHA Streamline Loan Work?
Only current FHA loan holders can apply for the FHA streamline loan. In other words, you can only refinance your FHA loan into another FHA loan. The other catch is that you can only refinance your existing outstanding principal balance. You cannot take cash out of the equity of your home.
The FHA streamline loan helps you get a loan with a lower payment or better term. It’s the FHA’s way of helping you get a more affordable loan without any verification. You can qualify for the loan as long as you have a timely mortgage payment history. In other words, you must have made your last 12 months of mortgage payments on time. Some lenders will allow a one-time exception with one 30-day late payment allowed. This will vary by lender, though and the late payment cannot be within the last 3 months.
You’ll also need to prove that there is a benefit for the refinance. For example, will you have a lower payment? Will you have a fixed payment because you’ll pay off an adjustable rate loan and take a fixed rate loan? These are a few examples of what the FHA and FHA lenders consider net tangible benefits. These are non-negotiable; you have to prove that you benefit from the refinance.
The combination of the timely mortgage payment history and net tangible benefit are all the FHA needs. They assume if you made your previous mortgage payments on time that you’ll be able to make the lower or less risky mortgage payments on time too.
What About Your Bad Credit?
The FHA doesn’t require lenders to pull your credit report for the FHA streamline loan. This could mean that you have bad credit and can still refinance. Watch out, though, because some lenders still pull your credit. It’s called a lender overlay. The FHA sets their minimum requirements. FHA lenders must follow these rules closely. The lenders are also able to add their own requirements if they feel it’s necessary.
This could mean that some lenders might pull your credit. If your score is too low (580 is the FHA minimum), it may prevent you from securing a loan approval. That doesn’t mean you are out of luck, though. There are hundreds or even thousands of FHA lenders out there that can help you with your loan – you have to shop around.
What Else Does the FHA Require?
In addition to bad credit, you can even be upside down on your loan. Yes, this means that you can owe more than the home is worth and still refinance. Again, this is because the FHA requires that you have a benefit for the refinance. They are already guaranteeing a loan for you. If you are able to refinance into better terms, it doesn’t matter if you are upside down. In fact, with a lower payment or less risky term, you are more likely to be able to keep up with your mortgage payments.
Paying the FHA Upfront Mortgage Insurance
Keep in mind that just like you paid upfront mortgage insurance on your original FHA loan, you’ll pay it again. The fee is the same 1.75% of your loan amount. The good news, though, is that you may be eligible for an upfront MIP refund if you meet certain requirements.
The FHA provides a prorated refund of the upfront MIP that you paid after you hold the loan for six months. In other words, you can’t refinance with the FHA streamline loan until you have at least 6 months paid on your mortgage. At that point, you would receive 70% of the upfront MIP paid back. The FHA provides it as a credit towards your new upfront MIP cost. In other words, it decreases the amount you owe at the closing. The amount of the refund goes down each month, with the final month being the 36th month, which you would receive 10% back.
You can refinance your FHA loan even if you have bad credit. The trick is finding a lender that won’t pull your credit. The lenders are out there, you may have to shop around a little bit to find one, though. Once you do, it should be easy to get your FHA loan refinanced.