A VA or FHA streamline refinance can reduce the payments on your mortgage, fast.
Refinancing a mortgage can be a challenging process. Many borrowers who might benefit from refinancing put off doing so because they don't want to jump through all the hoops or are afraid they won't qualify. But for borrowers with VA or FHA loans, there's an option called a streamline refinance that offers a simple and convenient way to refinance with a minimum of fuss.
If you have a VA loan or FHA mortgage in good standing, approval for a streamline refinance is almost automatic. The VA and FHA streamline refinance options are fast-track programs with a simplified underwriting process that allows you to qualify based largely on whether you've stayed current on your mortgage payments.
No appraisal, credit check required
No property appraisal is required, so it doesn't matter how little home equity you have or even if you're underwater on your mortgage. You can still qualify if you've kept up the payments on your current VA or FHA mortgage. There's no requirement for a credit check, income documentation or employment verification either.
As long as you've stayed current on your mortgage payments, you've met the main requirement. You allowed to have one missed payment over the past 12 months, but must presently be up-to-date on your payments. The FHA streamline refinance also requires that your last three payments must have been on time.
You also must currently have either a VA or FHA mortgage – you can't use these programs if you presently have a different type of home loan. You're just changing out one VA or FHA mortgage for another. You also have to stay with the same type – you can't go from a VA to an FHA streamline loan or vice versa, for example.
Rules may vary by lender
These are the basic guidelines set down by the VA and FHA, but individual lenders may have their own requirements as well, known as overlays. Some VA or FHA streamline refinance lenders may still require an appraisal, credit check or employment verification, for example. So if you're looking for a streamline refinance but are underwater on your mortgage, have bad credit or are unemployed, you just need to find a streamline mortgage lender who doesn't have those overlays.
Since you're obtaining a new mortgage, you don't need to use the same lender that has your current mortgage. You can use any lender that does VA or FHA streamline refinances.
Streamline rates and closing costs
One of the main reasons for doing a streamline refinance is to get a lower mortgage rate and reduce your monthly payments. You can also use either a VA or FHA streamline refinance to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan, or to stretch out your mortgage term to reduce your monthly payments.
Both VA and FHA streamline refinance rates are comparable to those you would pay on a regular VA or FHA home purchase or refinance; there is no rate penalty simply for using the streamline refinance option. Closing costs are the same as a regular refinance, except you do not have to pay for a credit report or appraisal when those are waived.
A VA streamline refinance allows you to roll some closing costs and even costs of certain energy efficiency improvements into the new loan. With an FHA streamline refinance, all closing costs must be paid separately. However, most VA and FHA streamline refinance lenders offer a "no-closing-cost" option where the lender pays the closing costs in exchange for a higher mortgage rate.
There are limitations. You cannot take cash out of the transaction with either a VA or FHA streamline refinance; that is, cash-out refinancing is not allowed. Nor can you incorporate a home equity loan or other second mortgage into your primary home loan; for that, you would need to do a regular refinance.
At least 210 days must have passed since you closed on your current mortgage to be eligible for an FHA streamline refinance.
An FHA streamline refinance also requires that a borrower realize a "net tangible benefit" for the loan to be approved. This is usually defined as a reduction in your monthly mortgage payments of at least 5 percent, though switching from an ARM to a fixed-rate loan also qualifies. Reducing the loan term, such as from 30 to 15 years, does not by itself qualify as a net tangible benefit.
A VA streamline refinance merely requires that your new mortgage rate be lower than the old one, unless you are refinancing out of an ARM, in which case your new rate may be higher. A VA streamline also allows you to refinance to a shorter term if you wish, even if your mortgage payments increase as a result.
About FHA mortgage insurance
The date you obtained your current mortgage will determine what you have to pay for FHA mortgage insurance with a streamline refinance. As with any FHA loan, an FHA streamline refinance requires that you pay both an upfront mortgage insurance premium (MIP) at closing and, on loans with less than 20 percent equity, an annual MIP as well.
If your current home loan was obtained on or after June 1, 2009, your mortgage insurance premiums on an FHA streamline loan are the same as on a regular FHA refinance or home purchase mortgage: an upfront MIP of 1.75 percent of the loan amount, plus an annual MIP ranging from 0.45 percent to 0.85 percent, depending on the length of the loan and the amount of equity.
Borrowers who obtained their current FHA mortgage prior to June 1, 2009 are "grandfathered" and pay an upfront MIP of only 0.1 percent of the loan amount and an annual MIP of 0.55 percent.
Note that borrowers with more than 20 percent equity do not have to pay the annual MIP at all. If you are currently paying an annual FHA MIP and have accumulated more than 20 percent equity, you can use a streamline refinance to cancel your annual mortgage insurance, though that will require an appraisal as part of the process.