How Does an FHA Streamline Refinance Work?

If you’re a homeowner in the hunt for a refinance loan, you’ve probably heard about the FHA streamline refi loan. But what is this program, and how does it work? What benefits does a streamline refinance offer when compared to a regular refi loan? These are some of the questions I’ll address in this lesson.

What’s an FHA Streamline, Anyway?

Let’s start with the basics by defining the streamline refinancing program. Here’s a simple definition for you. An FHA streamline refinance is backed by the federal government, and there’s typically less paperwork required than with a regular refi loan. That’s where the term “streamline” comes from — you don’t have to provide as much documentation as you would with a non-FHA refinance.

I’ll discuss the requirements and the application process soon enough, since that’s probably what you really want to know. But first, I want to clear up some common misconceptions people have about FHA streamline refi loans.

Common Misconceptions About Streamline Refinance

Let’s clear two things up before we go any further:

• First of all, the word “streamline” does not mean there are no costs involved. You’ll still pay closing costs on this type of refinance loan — I can guarantee that much. We discussed the meaning of the word above. It means less paperwork, and that’s all.
• Secondly, the Federal Housing Administration (FHA) does not make loans directly to consumers. They merely insure the loans made by primary lenders. So you won’t be applying for this program through the FHA, but through an FHA-approved lender.

Moving right along. With those two points out of the way, let’s talk about the requirements for this government-backed refinancing program.

Requirements for This Program

First and foremost, your current mortgage loan must be insured by the FHA. In other words, you must have used an FHA mortgage loan when you first purchased the home. If you’re not in this boat, there’s no reason to read any farther.

Secondly, you need to be current on your mortgage payments. The refi loan must also lower your monthly payments, because that’s the whole point. If the numbers don’t work in your favor by lowering your payments, then you’re not a candidate for an FHA streamline refinance loan.

And lastly, you cannot take cash out when refinancing under this program. In other words, you cannot tap your home equity for cash. That’s just not the purpose of this program, so if you want to do a cash-out refinance you’ll have to look elsewhere.

That was a lot to digest. So let’s recap the FHA streamline requirements we just covered:

1. Your must currently have an FHA-insured mortgage loan.
2. You need to be current on your payments. No delinquency / default.
3. The loan must result in the lowering of your monthly payments (principal + interest)
4. You cannot pull cash out of your home with this program.

These are the minimum requirements for the FHA streamline refi program. There are other qualifying factors I haven’t mentioned here, because I don’t want to go too far into the weeds. That’s your lender’s job! Mortgage lenders have their own criteria on top of the FHA criteria listed above — credit scores, debt versus income, etc. So let’s just say that if you meet the requirements listed above, you might be a good candidate for an FHA streamline refi loan. At the very least, you’ll be able to move on to the next step in the process … applying for a loan.

How to Apply for the Program

If you already have an FHA loan, then your current mortgage company is probably an FHA-approved lender. So you should start by contacting them and asking if they offer FHA streamline refinance loans. If they don’t (for whatever reason), then you’ll need to find another lender that’s on the approved list. You can find such a lender through this section of the FHA’s website.

I hope this lesson has helped you understand your refinancing options under the Federal Housing Administration’s programs for homeowners. If you have any questions about this topic, I recommend visiting the HUD website (FHA is part of HUD, in case you were curious). Good luck.

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