The FHA offers current mortgage holders the opportunity to refinance their loan with very little verification. It’s called the streamline refinance. If you have a current FHA loan that you have not paid late for the last 12 months, you may qualify. However, there’s one more thing – you must meet the seasoning requirements.
What are Seasoning Requirements?
The FHA requires that you have the FHA loan for a certain period before you refinance out of it. Think of the seasoning as a waiting period. It gives the lender a chance to make sure you can afford your payments before they go and fund you a new loan.
In general, you must wait the following periods:
- 210 days must have passed since your closing date
- Six months have passed since your first payment became due
- You have proof of at least 6 on-time monthly payments
In short, you must wait six months from the start of the loan to take advantage of the streamline program. However, this is probably to your benefit, as you’ll likely pay closing costs and the upfront mortgage insurance fee again.
Paying the Upfront Mortgage Insurance
There is one upside of refinancing your FHA loan within the first three years of taking it out – you may receive an upfront mortgage insurance refund.
The amount of refund you receive depends on how long you have had the loan. The FHA starts the refunds at the six-month mark as that is the earliest you can refinance. If you do refinance at that point, you’ll receive 70% of the mortgage insurance that you paid as a refund. Every month that passes beyond six months brings down your refund by 2%.
For example, after 7 months, you’d receive 68% back. After 12 months, you’d receive 58%; after 24 months, you’d receive 34% and after 36 months, you’d receive 10% back.
However, you don’t receive the funds as cash in hand. The FHA applies the funds to the new upfront mortgage insurance you owe on the refinance.
Other FHA Streamline Requirements
Aside from the seasoning requirements, the FHA requires a few more things in order to qualify for the streamline program:
- Timely mortgage payment history – If you have had your FHA loan for more than 12 months, you are allowed one 30-day late payment during the loans’ term. If you had the loan for less than 12 months, you must have made all payments on time with no exceptions.
- Net tangible benefit – You must be able to prove that there is a benefit for the refinance. Typically, a lower payment is enough as long as it’s 5% less than the original payment.
- Loan amount – Your loan amount cannot exceed the outstanding principal balance plus any closing costs and upfront mortgage insurance premiums.
What You Need to Qualify
The FHA streamline loan is very easy to qualify for and requires much less documentation than the original loan. The documents you’ll need include:
- Your FHA mortgage note showing your loan origination date and FHA loan number
- A copy of your mortgage statement
- The Closing Statement from your loan
- Proof of any assets you need if you are paying the closing costs upfront
- Information to contact your employer to verify your employment (not your income)
- Proof of homeowner’s insurance
What Lenders Don’t Verify
Aside from the seasoning requirements and payment history, lenders don’t require very much from you to qualify for the streamline loan.
FHA lenders do not have to verify:
- Assets (unless you need money for closing)
- Credit score
- Home value
The lenders can base their decision on your mortgage payment history alone, as long as you meet the seasoning requirements.
Of course, lenders can add their own requirements onto what the FHA requires. They are called lender overlays and they’ll likely differ from lender to lender. For example, one lender can require you to document your income, while another may require a home valuation or even to pull your credit score. You can avoid these overlays by shopping around to find the lender that fits your needs.
The seasoning requirements for the FHA streamline loan are as forgiving as the other requirements for this loan. It’s an easy loan to get if you want to lower your payment or change the term of your loan. Once you have the loan for six months, you are eligible for the program, just make sure it makes sense financially to pay the closing costs again.