When interest rates drop you’ll often hear the term “streamline” in mortgage advertisements. For many homeowners there is a real opportunity to take advantage of lower interest rates; so let’s examine closely what streamlining is all about and how it may benefit you.
The process of streamlining refers to the refinancing of an FHA loan. FHA rolled out the streamline loan process in the early 1980’s and according to guidelines they “are designed to lower the monthly principal and interest payment on a current FHA-insured mortgage...” If your current loan is not an FHA loan, you’ll need to speak to your lending professional to see if there’s a similar program for the type of loan you have.
The term streamline refers to the reduction in the amount of documentation and underwriting required to be performed by the lender. Additionally, many FHA loans can be refinanced without the need of an appraisal! Obtaining the original FHA loan typically requires thorough documentation of income, assets, and credit. This dramatic reduction makes the mortgage process much easier on both the homeowner and the lender. The result of the reduced paperwork on the lender’s behalf often times results in lower costs to the homeowner as well.
Streamlines can be summarized as follows:
- The required documentation and underwriting is less than a regular FHA loan
- There may not be a requirement for an appraisal
- The borrower must save more than 5% of their current principal, interest, and monthly mortgage insurance in order to qualify
- The new loan amount cannot increase substantially if the no appraisal option is used
Minimum 5% Savings
The litmus test FHA places on streamline loans is the borrower must see a drop of at least 5% of their current principal, interest, and mortgage insurance in comparison to their new payment. As an example, let’s assume the following:
Principal and interest payment: $850
Homeowner’s insurance: $75
Real estate taxes: $200
Mortgage insurance: $150
The minimum savings required in this scenario is $50 a month which is principal and interest of $850 plus $150 for mortgage insurance multiplied by 5%. As you can see the homeowner’s insurance and taxes are excluded in this calculation.
Determining Streamline Loan Amounts – No Appraisal Option
The maximum amount of the new streamlined loan allowed by FHA without an appraisal is the current outstanding balance minus the refund of the up front mortgage insurance premium on the current loan plus the new up front mortgage insurance premium. Additionally, the outstanding balance may include accrued interest due for the month. Here’s an example of determining the new streamlined maximum loan amount:
Current balance: $100,000
Accrued interest due: $500
Up front MI refund: $600
New up front MI: $999
New maximum loan amount:$100,899
To arrive at this amount you take the $100,000 balance, add the $500 of accrued interest due, subtract the $600 refund to get $99,900. The new up front MI (as of early 2012 up front MI is 1%) is 1% times $99,900 or $999. Since up front MI can be financed, you add $999 to $99,900 to arrive at the $100,899 maximum loan amount without an appraisal.
As you can see there are a lot of benefits to streamlining an FHA mortgage. Remember the 5% rule is the minimum savings required; many people save a lot more than 5%, which can equate to hundreds of dollars a month in savings. Contact your lending professional to find out if a streamline loan is available to you.