(Updated February 2015)

An FHA or VA streamline refinance can reduce the payments on your mortgage, fast.

It's not often that you can use the words "efficient" and "federal" in the same sentence. But the streamline refinancing programs of the Federal Housing Administration (FHA) and Veterans Administration (VA) are two of those rare government programs where results can be obtained in a relatively short period of time.

Short, sweet road to funding

If you hold an FHA or Veteran's Administration (VA) mortgage in good standing, you may qualify for a quick trip to a lower payment. The VA and FHA streamline refinances are fast track programs that reward you for keeping your loan current. These programs incorporate a shortened underwriting process on the assumption that if you can afford your current loan, you can definitely afford a loan with lower payments.

A streamline refinance can lower your payments either by taking advantage of a lower market interest rate, or by extending the maturity date of the loan. You can also switch out of an adjustable-rate mortgage (ARM) for a fixed-rate one.

The VA streamline refinance is formally known as an IRRRL - Interest Rate Reduction Refinance Loan. Your new monthly payment must be lower than your current one, with one exception - you can refinance to a higher rate if that allows you to refinance out of an ARM.

The FHA streamline refinance is a bit more flexible. In addition to refinancing to a lower rate, monthly payment or switching out of an ARM, you can also refinance into a shorter term with a 15-year fixed-rate mortgage. In that case, your monthly payments might increase, but you'll pay the loan off faster - and you'll probably have a lower interest rate as well. An appraisal may be required in this situation.

No appraisal required

The FHA or VA refinance streamline processes are about as close to automatic approval as it gets. There's no need for a property appraisal. Nor is there any requirement for a credit check, income or employment verification, or a check of your financial assets. As long as you're current on your mortgage with no more than one late payment in the past 12 months, you're in.

This means you can use these programs to refinance an FHA or VA mortgage even when you are underwater on the loan; that is, owing more than the property is worth. That's normally a serious impediment to refinancing, but it's not a problem with a streamline. By contrast, borrowers with underwater mortgages backed by Fannie Mae or Freddie Mac must refinance through the federal Home Affordable Refinance Program (HARP), which can be a more complicated process.

(To be sure, some lenders may impose their own overlays, or requirements, over and above those set by the FHA or VA. So an individual lender may seek an appraisal or credit check, even though the FHA or VA doesn't require that. So just how "streamlined" your refinance is will depend in part on the lender you choose.)

Why is it so easy? Simple. If you have an FHA or VA loan, that agency is already guaranteeing your current mortgage. It isn't taking on any more risk by refinancing you into a new loan at a more affordable rate or monthly payment - in fact, that lowers the risk of default. So they're happy to let you refinance (note: you can only refinance into the same type of loan you had before; you can't do a streamline refinance from a VA to an FHA loan or vice versa - that would require a conventional refinancing).

No significant cash out

The two programs include a very limited cash-out option that may be used for rolling your origination and closing costs into the loan itself, so you don't have to pay any fees up front. But that's as far as it goes. You cannot use a streamline refinance to borrow against your home equity to receive a cash-out disbursement at closing, nor can a streamline refinance be used to combine two or more mortgage liens - such as a home equity loan and primary mortgage - into a single loan.

You can still get a cash-out option with an FHA or VA refinance, but that will require an appraisal and other conventional requirements of refinancing.

About mortgage insurance

FHA streamline refinances offer another perk: if you obtained your current FHA mortgage prior to June 1, 2009, you can save a lot on your mortgage insurance premiums. Those borrowers are entitled to a negligible upfront premium of 0.01 percent on a streamlined refinance, with an annual premium going forward of only 0.55 percent.

That compares to an upfront premium of 1.75 percent and an annual premium of 0.85 percent on 30-year FHA loans with 3.5 percent down. In addition, borrowers with the older mortgages can still cancel mortgage insurance on their refinanced loans after 11 years if they have at least 10 percent equity at closing; other borrowers must carry insurance for the life of the loan.

VA loans, on the other hand, generally do not require mortgage insurance because the VA guarantee amount takes the place of a 20 percent down payment on all but very large loans, which is enough to eliminate the requirement for insurance.

No cost/low cost streamline refinancing

Some lenders offer no-cost streamline refinances. These carry a slightly higher interest rate, but the lender pays most of the closing costs on your behalf. You may also have the option of rolling the closing costs into your loan balance, which is another way to reduce your out-of-pocket expenses.

So here's the lesson learned: Make your FHA or VA mortgage payments efficiently, and you'll get the same kind treatment back from the feds.

Published on September 1, 2008