What is FHA Streamline Refinancing - Weighing the Benefits

FHA stands for the Federal Housing Administration.  The Streamline is a way for existing FHA loan holders to refinance without going through the entire underwriting process.  Sort of like a Mini-Refi.

Basic Qualifications

620 Middle Fico for each borrower - Must have an existing FHA loan with no lates in the past 12 months.

Benefits of FHA Streamlines

No Appraisal
The single biggest benefit of the product is that there is no requirement for an appraisal with most companies.  So, it allows people who are under water by any amount an opportunity to get a lower payment.  Because there is no appraisal, you cannot do cash-out or debt consolidation with this product, it's strictly to reduce the rate at which you are financed.

No Debt to Income Qualification
There is no industry standard Maximum DTI ratio.  Although some lenders will put a cap on DTI, it's not hard to find a lender that will approve the loan even though the DTI may exceed 60%.  FHA makes your lender certify that the borrower has a source of income and underwriters will want to make sure the income is listed and that it's accurate.

Very LOW Closing Costs
This may not be true with all lenders, but for the most part the closing costs on an FHA Streamline will be minimal because NO Third Party Closing Costs can be financed into the new loan amount calculation which means if a lender wanted you to pay for a processing fee of $695.00 you would have to write a check and bring it to closing.  Usually your new lender arranging the financing will cover between 1000-5000 in closing costs for you so that you do not have to bring a check to closing.  The new loan company makes a premium for funding your loan of up to 4% of the loan amount so they will keep the difference between the closing costs they have to cover and the total premium they receive.

Basic Break-Even Point Calculation
Because the effective costs of an FHA Streamline are so minimal (1.00%) the break-even point on these transactions are very near in the future.  Example:  Say you are looking into a potential streamline that saves you $50.00/month on a loan amount of 100,000.  Your 1% FHA UFMIP (Up Front Mortgage Insurance Premium) is $1,000.00.  The break-even point is 20 months.  Which means you would have saved 50.00/month for the first 20 months which was equal to the fee charged to you to complete the streamline.

What Is the Down-Side of doing Streamlines

The FHA Streamline has gone through many face-lifts in the last few years.  Recently, FHA moved it's mortgage insurance premiums around.  On April 2010, FHA increased it's Monthly Mortgage Insurance factor from .5% to 1.1% while at the same time decreased it's Up-Front MIP from 2.25% to 1%.  At first glance you might think that this wouldn't have a big impact because they just increased the monthly fee and decreased the up front costs at the same time.  The end result is that people pay a lower up front cost and incur significantly higher monthly costs which impacts how much you can actually save each month by lowering the rate.  If you reduce someones rate from 6% to 4.5% you save them 186.10 in interest.  Then you factor in the increased MIP which used to be 83.33 to 183.33.  So the changes to FHA premiums resulted in 100.00 less in monthly savings to a net savings from 186.10 to 86.10.

FHA has done this manipulation of the premiums for decades.  What justifies the changes I don't pretend to know.  What I do know is that many people have not been able to save a substantial amount monthly due to the newest changes and this all comes at a time when homeowners are struggling the most.

Eventually the FHA MIP will drop off of the total monthly payment once the principal balance reaches 78% of the most recent appraisal value on record with FHA's system.  This normally takes 132-140 payments into your payment schedule which equals 11+ years from the start of the loan.  At least the FHA Streamline doesn't have a huge impact on that schedule other than the slight difference between the old and new loan amounts.
  

For more information on FHA, visit my company's website: FHA Loans