The FHA Streamline loan offers the chance to refinance without much verification at all. The largest issue is the net tangible benefit requirements. These are non-negotiable with the FHA. Everything else is fairly straightforward and even flexible. Without enough of a benefit, though, you’ll have to use a credit qualifying mortgage program. Read on to learn more about the net tangible benefit and what you need to know.
What is the FHA Streamline?
First, let’s look at the FHA Streamline. This program offers FHA customers a chance to refinance. It’s not your typical refinance, though. You don’t have to go through the rigorous underwriting process again. If you qualify for a non-credit qualifying refinance, you have two things to prove – timely mortgage payments and a net tangible benefit. You don’t need your credit pulled or to pay for an appraisal. You don’t even have to provide proof of your income. Lenders strictly care about your payment history and the benefit of the refinance.
Both of the above requirements are equally important to the FHA. Timely mortgage payments prove you can afford the mortgage. Most lenders don’t allow any late payments in the last 12 months. Some may allow up to one 30-day late payment, as this is what the FHA allows. Without pulling your credit, lenders need to know that you can make your payments. With a timely mortgage payment history, lenders assume you can afford the lower payment the streamline refinance provides.
The net tangible benefit requirements are important too, though. They show the lender that you benefit in some way. In other words, the benefits of refinancing must outweigh the costs. Without a benefit, there’s no reason to go through the refinance. In fact, lenders put themselves at risk if there isn’t a benefit. We discuss the most important benefits below.
Saving Money is a Must
The most common net tangible benefit is saving money. Generally, borrowers seek a lower interest rate. In turn, this provides a lower mortgage payment. That satisfies the net tangible benefits right there. Some lenders apply the 5% rule. You must save at least 5% on your payment in order to qualify. Other lenders don’t abide by this rule. They assume saving any money is helpful.
Other Allowances for Net Tangible Benefit Requirements
A lower mortgage payment isn’t the only way to get approved for the FHA Streamline. There are many ways to prove you benefit from the refinance:
- Lower amortization period – The less time you need to pay the money back, the less risk you pose to the lender. Over the life of the loan, you pay less in interest too. In this case, your payment may increase. As long as it is less a 20% increase, though, it qualifies for the program.
- Refinancing out of an ARM – Adjustable rate mortgages are risky. Refinancing into a fixed rate often satisfies the net tangible benefit requirement. Again, your payment may increase. Watch interest rates to make sure your payment won’t increase more than 20% to ensure that you qualify.
Other Requirements for the FHA Streamline
Outside of the net tangible benefit, you must meet a few other requirements.
- You must own the home for at least 6 months. You must also have made at least 6 payments before applying for the refinance.
- You must use an FHA lender. It doesn’t have to be your current lender, though. Any FHA approved lender qualifies.
- Your loan amount can’t exceed the outstanding principal balance plus any interest. You can’t roll the closing costs into your loan.
- You can’t receive any cash from the transaction.
The FHA Streamline is strictly to lower your payment or get you out of a risky loan.
The Benefit of the FHA Streamline
The largest benefit homeowners see today with this program is the lack of need for an appraisal. Homeowners who are upside on their homes can still refinance. This is the largest reason people use this program. It enables them to save money and get ahead. Saving money on interest may make you able to pay more towards your home’s principal. Eventually, you won’t be upside down on your loan any longer.
This program also benefits borrowers with less than perfect credit. If you took out the FHA loan when rates were higher, you may still refinance if your credit isn’t great right now. Most lenders don’t pull your credit. As long as you have timely mortgage payments over the last 12 months, they don’t have a reason to pull your credit.
The program isn’t only for borrowers in “hot water” though. Any borrower with an FHA loan that wants to save money may benefit.
How Soon Can You Use the FHA Streamline?
The FHA requires borrowers to wait 210 days or after making 6 payments before refinancing with this program. This gives lenders enough time to determine a timely payment history. If you only own the home for 6 months, you can’t have any late payments during that time. If you own it for 12 months, though, you may be allowed one 30-day late payment within the last 12 months. Again, this varies by lender.
Just like many other loan programs, the lender’s guidelines may differ from what the FHA states. They can’t require less than the FHA, but they can require more. Lenders fund the loans, so they have the final say in what is approved. For example, some lenders pull credit. Other lenders run an automated valuation on your home. This is a computer program that determines the value of your home. Lenders want to make sure their investment is protected. This is especially important in areas with declining values and many upside down homeowners.
The best way to ensure approval on an FHA Streamline and to meet the net tangible benefit requirements is to shop around. Any FHA approved lender can provide you with the loan. Shop around for different rates and terms to find the one that is most beneficial to your situation.