Is an FHA Streamline Refinance a Good Idea?

What Is an FHA Streamline Refinance Loan?

The FHA streamline refinance program is designed to make it easy for FHA loan holders to apply for refinancing on their existing FHA mortgages. In many cases, the application process requires far less paperwork than is required for most mortgage applications. Applicants may also be exempt from a credit check or from paying for a home appraisal, both of which are typically required with standard mortgage refinance loans.

What Are FHA Streamline Refinance Requirements?

To qualify for an FHA streamline refinance loan, you must meet these requirements:

• You must already have an FHA mortgage on the property being refinanced.
• You must have made at least six payments on your original FHA mortgage, at least six months must have passed since your first payment due date and at least 210 days must have passed since the closing date on that original loan.
• Your mortgage payments (including those on any second mortgages) must be current, you must have had no payments 30 days past due in the six months prior to submitting your application and no more than one payment that was 30 days overdue in the 12 months preceding your application.

The FHA further defines two categories of streamline refinances:

• Non-credit-qualifying FHA streamline refinance loans are the most streamlined option. Lenders are permitted to issue them without requiring a home appraisal, new credit check or income validation, and without requiring a minimum debt-to-income (DTI) ratio.
• Credit-qualifying FHA streamline refinance loans typically entail more paperwork and require a credit check and income verification.

Lenders have some discretion as to whether to offer non-credit-qualifying or credit-qualifying loans, but they must consider a credit-qualifying loan under certain circumstances:

• A change in the mortgage term (for example, in a conversion from an adjustable-rate mortgage to a fixed-rate mortgage) will increase your monthly payments by more than 20%.
• You have assumed payments on a pre-existing loan and have been making payments for less than six months.
• Removal of one or more borrowers listed on the original FHA loan triggers a due-on-sale clause in the original loan agreement, which entitles the lender to demand payment in full (and effectively blocks a new owner from taking over payments on an existing mortgage).

Other considerations that apply to FHA streamline refinance loans:

• If a new borrower (such as a spouse) is added to the streamline mortgage application, the lender may include them on non-credit-qualifying streamline refinances without checking their credit.
• A borrower can only be removed from the original loan application if you show that you have been making mortgage payments on your own for at least six months, and that you have been assigned title to the property through an inheritance, divorce decree or other legal means.
• In non-credit-qualifying streamline refinances conducted without an appraisal, the home's appraised value at the time the original loan was issued is used to determine if mortgage insurance points (MIP) must be paid; if the down payment on the new loan is less than 20% of that sum, MIP will be required.

Is an FHA Streamline Refinance a Good Idea?

In a way, approval requirements for an FHA streamline refinance aim to ensure it is a good idea. In addition to the preceding requirements, the FHA stipulates that your new mortgage must have a "net tangible benefit" to you, defined as either:

• A reduction of at least 5% in your monthly mortgage payment (the principal and interest portion of the payment, plus any applicable mortgage insurance premiums); or
• Conversion of an adjustable-rate mortgage (ARM) to a fixed-rate loan with an interest rate no more than 2% greater than the current rate on your ARM.

Those requirements typically mean an FHA streamline refinance will save you money over time in comparison to your original loan, but it may be increasingly difficult to meet them in the current climate of rising interest rates.

For about a decade following the 2008 housing crisis, U.S. interest rates fell to historic lows, making it relatively easy for borrowers who obtained mortgages before or during the crisis to refinance at lower interest rates. Since late 2021, however, a climate of rapidly rising interest rates means current mortgages may be more expensive than those obtained in the 2010s. In these cases, refinancing doesn't make sense.

An FHA streamline refinance still could make sense for you under the following circumstances, however:

• You currently have an adjustable-rate mortgage (ARM) issued through the FHA, and you qualify for a fixed-rate loan at a lower interest rate.
• You obtained a fixed-rate FHA loan before or during the 2008 housing crisis, and your interest rate is sufficiently higher than current rates.
• Your credit situation has changed appreciably since you obtained your current FHA loan and you now qualify for better loan terms.
• You are having trouble covering your current monthly mortgage payment and an FHA streamline refinance provides lower payments you can afford.

When comparing mortgages, details are critical: Even if you can qualify for a streamline refinance that meets the 2% rate-reduction requirement, you should compare the total costs over time of your existing loan and the refinance loan—including any closing costs that may apply to the new loan—to make sure it makes sense for your specific circumstances.

What Are FHA Streamline Refinance Alternatives?

Rising interest rates affect government-backed mortgages and conventional mortgages alike, so if an FHA streamline refinance cannot save you interest, it may be challenging to find other loans that do.

If, however, your FHA loan is an ARM and you are concerned about future rate increases, or if you are having trouble covering your current mortgage payment, it's worth speaking with a lender or mortgage broker to see if you are eligible for more affordable options, which may include:

• VA loans, open to qualified veterans, servicemembers or surviving spouses
• USDA loans, for those who meet household-income limits and the home is in a qualifying rural area

The Bottom Line

An FHA streamline refinance loan can potentially make it simple to replace your existing FHA mortgage with another that offers a lower interest rate or lower monthly payments. While the current climate of rising interest rates may make it challenging for borrowers who received FHA loans in the 2010s to find better rates, the streamline refinance can still be a good option for those with older FHA loans or who qualify to replace adjustable-rate loans with fixed-rate loans.