Refinance with an FHA Loan

For more than 20 years, the FHA has been allowing FHA borrowers in good standing to refinance under a streamlined procedure that involves no asset, credit, employment, or income verification.

In The Wizard of Oz, Dorothy, Toto, Scarecrow, Tin Man, and the Lion, couldn't get lost on their way to Emerald City because they had the yellow brick road to guide them. FHA mortgage borrowers who want to refinance have their own yellow brick road, as well-it's known as the FHA streamline.

Quick and painless

FHA's streamlined approval process is an expedited mortgage refinancing program that's only available to existing agency borrowers. The process forgoes the usual asset, credit, employment, and income verification, allowing qualified borrowers to access lower prevailing interest rates and achieve a lower payment level as soon as possible.

This program isn't for at-risk borrowers; to be eligible, borrowers must have at least six months worth of payment history on the existing mortgage loan, with no late payments during the life of the loan or during the previous 12 months, whichever is shorter. Also, since the intention of the streamlined refinance process is to allow borrowers to lower their payments quickly, it can't be used for cash-out refinancing. In some cases, the streamlined process can be used to transition the borrower from an adjustable rate to a fixed rate; the rule of thumb here is that the payments on the new mortgage must be the same as, or lower than, those of the existing mortgage. If the payments are higher, the borrower must go through the traditional qualification process.

Flexible closing payments

Borrowers who are refinancing a primary residence through the streamlined process can finance their closing costs or pay them upfront:

· Financed closing costs. Borrowers must pay the closing costs, but they're rolled into the loan balance and paid off over time. Financing the closing costs is appropriate if the borrower is short on cash, as long as the home has sufficient equity to support the additional debt. The total debt on the new loan must be less than the funded amount of the previous one; otherwise, an appraisal may be required.

· Closing costs paid upfront. A more traditional structure requires the borrower to pay the closing costs upfront and out-of-pocket. In the long run, this option usually makes the most sense. It results in a slightly lower payment, and reduces the total interest expense associated with the loan.

Investment properties can also be refinanced through the streamlined procedure, as long as an appraisal isn't required. If it's determined that an appraisal is necessary, the investment property refinance must proceed through the normal channels.

The FHA's streamlined process is the fast track to mortgage refinancing. It may not be taking borrowers to Emerald City, but it's allowing them access to lower payments right away-and that's the makings of an attractive destination.