The FHA Streamline Refinance is a great way to lower your interest rate or save money every month. The simple refinance program requires very little from you. Underwriting is not nearly as in-depth as it was for your original FHA loan. Of course, the loan still needs to go through the proper channels to get approval. So the big question is, how long does it take? Of course, there is no straightforward answer – it depends on the lender you use. Generally, you can expect between 3 and 6 weeks to close on your FHA Streamline loan, though. It is a shorter process, but there are still certain steps you must take.
Apply for the Loan
First, you must apply for the loan. Contrary to popular belief, you don’t have to use your current lender. You are free to shop with any FHA lender you please. Some borrowers stick with their current lender because it is easier, but they don’t always offer the best deal. They already have you as a customer, so there is no motivation to provide you with a great deal to gain your business. Shopping around with at least three lenders will yield you the greatest results.
The good news is, when you apply for an FHA Streamline loan, you don’t have to disclose as much information as you did for the original loan. Lenders may ask for the standard information, such as your gross monthly income, current debts, and estimated credit score, but they don’t have to verify it. This cuts down on the time it takes to get through the process.
Gather your Paperwork
Another time saver with the FHA Streamline loan is the lack of paperwork you must provide. The FHA only requires you to provide the following:
- Proof of your identity
- Proof of your current residency (it should be at the house you purchased with the FHA loan)
- A copy of your mortgage or note
Some lenders may go as far as asking for your employer’s information for a Verification of Employment. This doesn’t mean they will verify your income, but they may want to ensure that you are employed still. They may also ask for copies of your mortgage statements if they need proof of your timely mortgage payments.
Underwriting the FHA Streamline Loan
Once you gather the little bit of paperwork the lender needs, your FHA Streamline loan can go to underwriting. Because there is less to verify, this process will likely take less time. Of course, it depends on the lender. Some lenders verify everything because they want to make sure you truly can afford the loan. They may ask for a paystub or two or they may want to clarify something they see on your credit report. Other lenders just follow FHA rules and as long as you have a timely mortgage history with no late payments in the last 12 months, they approve you for the loan.
As is the case with any loan, you may stumble across a few obstacles. Knowing ahead of time what they are can help you avoid a delay in the underwriting of your loan.
Don’t Change Jobs
This is a big one. Many lenders verify your employment at a minimum. This way they know you are employed even if they don’t verify your actual income. If you recently changed jobs or worse yet, left your job, you may have difficulty securing even an FHA Streamline Refinance. Try staying at your job until you complete the refinance and then make the switch. This will cause fewer issues when underwriting your loan.
Maximize your Credit Score
You must wait at least 210 days after the origination of your loan to refinance your FHA loan. During that time, you can work on your credit. Most lenders require at least a 620 credit score, even though the FHA does not require them to view your credit. If you know your score was lower than 620 at the time of the original loan or you had some mishaps along the way, take the time to fix your credit. Make your payments on time and pay off any debts you can. This way if the lender happens to check your credit score it will not hinder your chances of approval.
Have Money for Closing Costs
The FHA Streamline Refinance rules do not allow you to roll your closing costs into your loan. The maximum loan amount may not exceed the current outstanding principal balance plus the new upfront mortgage insurance minus any upfront mortgage insurance refund you receive.
Here’s how that works:
The lender looks at your current mortgage to see how much you still owe. This is the basis of your new loan amount. They then calculate 1.75% of this loan amount to figure how much upfront mortgage insurance you will owe. From that, they can deduct your refund. You are eligible to receive a portion of the original upfront mortgage insurance you paid as long as you refinance within the first 3 years of the loan. The amount you receive goes down each month, with the 36th month leaving you with a 10% refund.
Because you cannot roll the closing costs into your loan, you need the money to pay them. Start saving early so you know you will have enough to cover them. FHA Streamline closing costs are usually pretty similar to the closing costs on any other loan. There may slightly fewer fees because there is less to verify, but a few thousand dollars for closing costs is not out of the norm.
Show a Benefit
The FHA requires lenders to make sure there is a benefit for you to refinance with the streamline program. This benefit must be that you save money. In fact, you must save at least 5% each month. This doesn’t mean you must have a lower interest rate. There are several reasons your payment could decrease:
- Lower principal balance means a lower payment
- Lower interest rate
- Lower annual mortgage insurance
The most common reason for the refinance is to lower the interest rate, though. As long as you can show that you save money, the lender can move forward with the loan.
Underwriting the FHA Streamline loan is definitely much simpler than any other loan, but some lenders make it more complicated. Don’t assume you won’t have to verify certain aspects of your financial life. Try to make sure everything is in good shape so if a lender does ask questions, you can still secure the approval you need for the loan.