Refinancing your home usually involves just as much headache as the original purchase. The same steps are involved, and since you have decided to refinance, you probably have the added pressure of a high payment or difficult equity position. You may even be underwater (owing more than your house is worth) because its value declined since you bought it.
Is there any way to make the refinancing process easier? Yes, if you have an FHA loan. The Department of Housing and Urban Development (HUD) offers a Streamlined Refinance Procedure for holders of existing FHA mortgages.
One of the main goals of the Streamline Program is to assist underwater homeowners. It allows the homeowner to use the original purchase price as the home's current value instead of requiring an appraisal. This negates the LTV (Loan-to-Value) limits that would have disqualified many underwater homeowners, and allows them to refinance to drop their payments to a more tolerable level.
In fact, you have to improve payments as part of qualifying for a Streamline refi. You must show a "Net Tangible Benefit,” generally considered to be at least a 5% reduction in the combined principal, interest, and mortgage insurance portions of your mortgage payment (excluding taxes), or a switch from an adjustable rate to a fixed rate mortgage.
Before you can apply for a Streamline refi, you must have made at least six mortgage payments, with no late payments allowed within the last three months and only one late payment in the last twelve months. You also have to wait at least 210 days from the closing date on your original loan.
After that time, you have incentive to refinance as soon as possible – because you receive a proportional refund on your mortgage insurance premium that you paid up front with the original FHA loan. The longer you wait, the more you "consume" the mortgage insurance against the original loan, until the three-year mark has passed and no refund amount is left.
Limits to qualifying for a Streamline refi are minimal. Your income does not have to be verified, or even your employment. You can be unemployed and still qualify. Your credit score is irrelevant – it isn't even checked. HUD does not care what your home is actually worth now or how much equity you have in the home.
How can HUD blow off these concerns? They really don't. Since you are refinancing an existing FHA mortgage, they have already insured it with your existing lender – and they know that at one time you met the standard qualifications for an FHA loan. Their goal is to make sure you can continue to make the payments with a lender and not default. As strange as it may sound, this program is in the FHA's best interests.
It's a great deal for you, but it isn't free. Once you get past the simplified qualification, it is still a loan with the same type of traditional closing costs (except for an appraisal).
With a Streamline refi, you cannot include the closing costs and fees into the loan balance due to FHA rules. You will either have to pay those costs upfront at closing, or enter into a "no-cost Streamline." In that case, the interest rate is raised slightly to cover those costs. You cannot tack it onto the principal, but you can tack it onto the interest.
If you have an FHA loan, take a few moments to see if you can benefit from the Streamline Refinancing program. If so, do it quickly, before interest rates rise significantly.