The FHA is very flexible in its desire to help current homeowners to refinance; however, there are some stipulations you must meet. One of the largest stipulations with the FHA streamline refinance is to have a net tangible benefit. This means that you benefit from the loan and can prove it. Not only that, however, you have to be able to meet the minimum requirements that the FHA states should be met in order to prove that the benefit is worth it.
What is the Net Tangible Benefit?
The basic net tangible benefit requirement is that the principal, interest, and mortgage insurance premium payment decrease by at least 5 percent from the current payment. The rule applies to you if you are refinancing from a fixed rate loan into another fixed rate loan. The exception to the rule applies if you are refinancing from an adjustable rate mortgage into a fixed rate mortgage. In this case, the payment might not decrease, and might even increase, but the stability of the fixed rate makes up the net tangible benefit in this case.
What a Net Tangible Benefit is Not
There are some things that you might consider a net tangible benefit in your own eyes, but the FHA does not see it as so. These cases include:
- Reducing the term of the loan – Even though refinancing from a 30-year loan to a 20-year loan is less risky for the lender, it is not enough of a net tangible benefit. In fact, because the payment will likely increase, it could pose to be a slightly higher risk for some borrowers.
- Refinancing from an ARM to a fixed rate with a significantly higher rate – It might be less risky to refinance from an adjustable rate mortgage into a fixed rate, however, if the interest rate is too high, the net tangible benefit is diminished. If the new interest rate exceeds 2 percent of the existing rate, there is no net tangible benefit for the streamline refinance.
- Refinancing from a fixed rate to an ARM – In some rare cases, borrowers refinance from a fixed rate to an ARM. Some do this in an effort to save money, but typically in the short-term, such as one year. If the interest rate on the ARM is at least 2 points lower than the current fixed rate, then the net tangible benefit can be found.
The Mortgage Insurance Dilemma
One area that many borrowers end up struggling is with the mortgage insurance premiums. Because mortgage insurance can go up depending on how long ago you originated your current FHA loan, you might have a harder time than you thought qualifying for the 5 percent decrease. FHA mortgage insurance premiums increased in recent years, which could play a factor in whether or not you meet the net tangible benefits requirement.
Ways to Make the Net Tangible Benefit Work for You
If you do not easily meet the net tangible benefit requirements, there are some simple ways to make it work for you. Consider the following steps:
- Work on the interest rate – You do not have to automatically accept the interest rate that a lender provides you. There are ways to negotiate it, including shopping around with different lenders as the easiest option. Another option is for you to negotiate a lower rate in exchange for paying discount points up front in order to meet the net tangible benefit requirements.
- Watch interest rates – Interest rates fluctuate on a daily basis, so keeping a close eye on the rates can help you lock the right rate in that enables you to meet the FHA requirements can help you. You can ask your lender to notify you as soon as the rate hits your threshold of acceptable.
- Increase your term – If you really need to lower your rate, you can work the system backwards. Rather than decreasing your term, you can increase it by refinancing from a 15 or 20-year term into a 30-year term. This automatically brings your payment down which can help you qualify for the refinance. Once you are on better terms with your finances, you can start to make the 15-year payments again, while having the stability of the 30-year amortization in the event that you begin to struggle again.
The Reason for the Net Tangible Benefit
It might seem awfully restrictive of the FHA to have the 5% net tangible benefit requirement in place, but it makes sense. The streamline refinance does not require you to provide very much qualifying information for the loan. You do not need to provide any of the following, according to the FHA:
- Income documents
- Credit scores
- A new appraisal
Basically, this means you could be making less money, hurt your credit, and be upside down on your loan and still get approved for the FHA streamline refinance. The net tangible benefit is the only added protection the FHA has in terms of deciding whether or not you are a good risk on top of your housing history, which is the main determining factor in your eligibility for the loan. If you make your housing payments on time and you are lowering your payment by at least 5%, you are more likely to be able to stay current with the new payments, which is what the lender and the FHA need to see.
If you have trouble establishing your net tangible benefit on the FHA streamline refinance, talk to your lender. There are typically ways to work around it so that you can show the 5% savings. If a lender is not willing to work with you, make sure to shop around – every lender not only has different requirements but also different interest rates and costs, which could help to determine the savings you have on your loan. The FHA streamline refinance is not hard to obtain, but it might require a little creative financing in order to ensure your approval overall.