The FHA Streamline Refinance is a great way to save money every month when you refinance from an FHA loan into another one. The only reason you can get an FHA streamline loan is if you are lowering the interest rate, with the exception for those borrowers that refinance from an adjustable rate mortgage to a fixed rate mortgage. Because of the nature of the loan, which does not require any verification, you must be saving money every month. The largest verification required for the streamline program is the payment history – you must have a perfect 3-month payment history on your housing payments for the three months immediately preceding the loan application and a maximum of one late housing payment in the 9 months preceding that time. Other than that, the verifications are very minimal, which is why your loan balance cannot increase for a streamline refinance.

Where does the Loan Balance come From?

The loan balance for your streamline refinance originates from the existing outstanding principal balance on your loan. This is the starting point. The only other amount of money that can be added to the loan is the upfront mortgage insurance premium you must pay. This amount is required on every loan and is equal to 1.75% of the loan amount. For example, on a $200,000 loan, the upfront MIP required would equal $3,500. This means the maximum amount of your new loan amount would equal $203,500. This amount could change, however, if your loan was originated less than 36 months ago. The FHA provides FHA borrowers with a refund of the upfront MIP they paid on their original loan. This amount is prorated based on the amount of time that has passed since the origination of the loan.

Since you cannot refinance your FHA loan until you have made 6 payments on it, the upfront MIP refund starts in the 7^th month, at which point you receive 70% of the amount of insurance you paid back as a refund, which is applied towards your new upfront MIP. The amount you receive goes down 2 percent for every month that passes, with the final amount of the refund totaling 10 percent of the amount paid in the 36^th month. This amount is taken off of the new upfront MIP, therefore reducing your maximum loan amount on the FHA streamline refinance.

Closing Costs are not Included

The one thing about FHA streamline refinances is that you cannot include your closing costs in the loan amount. You are restricted to the outstanding principal balance and the remaining amount of the upfront MIP charged – all closing costs must be paid at the closing. There is a way around this, though – you can negotiate a no-closing cost loan with the lender or a reduced closing cost loan, depending on how low you need the interest rate to go in order for the FHA to allow the streamline refinance.

Many lenders are willing to pay the closing costs for you in exchange for providing you with a slightly higher interest rate. Every lender differs in how much they will pay and how much it will affect your interest rate, which is why you need to shop around with different lenders to see which will offer you the best deal. If you do not have the couple of thousands of dollars necessary to pay closing costs, find a lender that will pay them for you. Of course, you should determine if it makes sense for you to refinance if you take the higher interest rate, though. In some cases, the savings do not equate to enough if you are not planning on staying in the home for the long term.

Overall, the maximum loan amount for the FHA streamline refinance is maxed out at the original outstanding principal balance plus any upfront mortgage insurance that is required. Lenders offer different programs for different borrowers, so do not be afraid to ask for help with the closing costs if you know that a refinance will benefit you in the long run.

The FHA Streamline Refinance is known for its few verification requirements. In general, you do not need a credit verification or verification of your income. In fact, you can even skip the appraisal, basically giving you a new loan for very little verification. This is according to the FHA, though. Every lender is able to add their own requirements to the process in order to minimize their risks. In some cases, this means requiring a specific credits core. In general, however, your credit will not be checked.

Deciding on Whether or not to Pull your Credit

One factor that determines whether or not you qualify for the FHA streamline refinance is your housing history on your current FHA loan. The lender must be able to determine that you have only one 30-date late payment in the last 12 months. In that time, however, the first three months prior to the loan application must have a perfect housing history; the late housing payment can only be in the 9 months before that time. If the lender cannot determine your housing history without a credit report, they might pull your credit.

The basic determinations regarding whether or not your credit needs to be pulled are as follows:

• You must have held the original FHA loan for at least 6 months
• You must live in the property
• Your loan amount many not increase unless it is because of the upfront MIP that you must pay
• Your refinance must be because of the ability to lower your payment or refinance from an adjustable rate mortgage to a fixed rate mortgage
• You must meet the housing payment requirements

Increased Loan Amount

If your loan amount increases more than 20 percent for any reason, your credit will need to be pulled. These instances are very rare as the maximum loan amount is restricted to the outstanding principal balance and the new upfront MIP minus any MIP refund. The one instance where it might occur, however, is if you were to refinance from an adjustable rate mortgage into a fixed rate. If the fixed rate is higher than the initial ARM rate, you might have an increase that totals more than 20 percent. If this is the case, the streamline refinance requires that you have your credit pulled to ensure that you can meet the financial requirements for the higher payment.

The FHA Template

The point of the FHA streamline refinance is to provide borrowers with a more affordable payment. The FHA does not require credit to be pulled, income to be verified, or an appraisal to be done because they use the original FHA loan as a template for approval for the new loan. In essence, you are lowering the payment, which means you are lowering the risk you provide to the lender and the FHA. Because FHA loans are guaranteed by the FHA, lenders have less to worry about as well, making it easier to qualify for the loan.

With all of this being said, some lenders refuse to provide any loan, including the FHA streamline refinance loan without pulling your credit. This is called a lender overlay and is the lender’s right in order to minimize the risks they take. When it comes to the FHA, you can qualify without a credit check, which could mean you qualifying with a credit score as low as 500. In reality, however, most people that have a credit score that low also have poor housing history, which would disqualify them for the loan, which makes not pulling your credit less of a risk for the FHA and the banks.

When you have reduced income due to a temporary situation, you may still be eligible to receive an FHA streamline refinance loan. Understanding the terms under which you would still be eligible can help you refinance the house you own despite your unfortunate plot in life at the moment. This pertains to situations such as a temporary disability or temporary leave of absence from work for personal reasons. In these cases, the FHA might be able to offer you special circumstances when it comes to coming up with your effective income or the income used to qualify you for an FHA mortgage.

What the FHA Streamline Lender Needs

The lender will require a variety of things from you in order to document your temporary reduction in income. These items include:

• A signed statement from you stating that you do intend to return to your previous employment as soon as you are able. It should also state the date that you anticipate that you will return to your employer.
• A signed statement from your employer verifying your intent to return to work and that you still have a job at said employer.

How your Income Works

The difficult part of the situation is that you will have to qualify for the FHA loan based on your reduced income.  This means that your disability income or any other type of income that you are receiving in compensation for your injury or illness have to be enough to keep your debt ratio low enough to qualify. Typically, this income is less than what you make on a regular basis, so make sure you take that into account if you are going to apply for an FHA loan while you have reduced income. There are ways that you can reduce your debt ratio with this lower income including:

• Pay off debts to reduce your monthly financial burden
• Keep the price of the house lower than you first anticipated you would be able to afford with your regular income
• Shop around for a lower interest rate to keep your fees down
• Put a larger down payment down if you have the funds to do so

Using Reserves

In some cases, your reserves can be used as supplemental income to help you qualify for a loan. The only instance that this is acceptable is when your regular income will not begin before the first mortgage payment becomes due on your new loan. You will need to have ample documentation stating that you will not start receiving your regular income before this date from your employer in order for this to work.

If you get approved, you can use your reserves as a part of your income. You must start off by showing the proof that you have adequate liquid assets available. You can verify this with bank statements over the last 12 months or with a Verification of Deposit that is completed by your bank. The reserves that are able to be used are only the surplus reserves. This means that if you need any of your assets to qualify for the loan, they cannot be used as your surplus reserves. Any money that is left over from that point may be able to be used, though. The money that is left is totaled up and divided amongst the months that remain between when your first mortgage payment is due and when you are expected to receive your regular income again. That supplemental income then gets added to your disability income to help your debt ratio become lower.

The good news is that even with reduced income, you might be able to qualify for an FHA loan. The bad news is it will take a little more work on your part to get it done. You have to have ample documentation stating that you can afford the loan even before you return to work, if that will be the case. Your lower income will have to prevail, so if you are not comfortable shopping for a house in a lower price range because of your lower income, make sure to use one of the above strategies to get your debts lowered, making your debt ratio more attractive even with your lower income. In order to use this program, however, you might have to shop with various lenders as not every lender will be willing to use the reduced income program that the FHA allows.