Homeowners that are underwater on their FHA insured mortgage have the ability to qualify for refinancing under guidelines set forth by the FHA. Beginning in the early 1980s, FHA has allowed “streamlined” refinancing for FHA insured mortgages.
A streamlined mortgage does not mean that the process is free, nor does it mean that it is processed any quicker. The term streamlined only refers to the amount of required paperwork the lender must complete to have the loan approved by the Federal Housing Authority.
To qualify for a streamlined mortgage, borrowers must:
- Currently have a mortgage that is insured by the FHA
- The mortgage that is being refinanced cannot be delinquent
- The refinancing must result in a lower payment each month for the borrower
- Borrowers may also qualify if they are trying to convert an ARM (adjustable rate mortgage) to a fixed rate loan.
Under these guidelines, listed by the Department of Housing and Urban Development, there are no requirements for the homeowner to have equity built up in the home since cash cannot be withdrawn from the value. This allows underwater mortgage holders to take advantage of this program without issue.
Borrowers that wish to refinance their homes through the streamlined process cannot take any cash out from their home. This type of refinancing is simply used to reduce the interest and payments on the current amount that is owed.
Under the guidelines set by HUD and the FHA, banks can offer streamlined refinancing to their clients with “no up-front fees,” but they cannot offer the product free. Lenders who offer no up-front fees are allowed to charge a higher interest rate to cover their document expenses, but they cannot roll over the costs of the process into the balance of the loan. Borrowers, who desire, may pay closing costs up front and secure a lower interest rate from the lender.
This type of loan is available to anyone who holds a current FHA insured mortgage, including investment properties. There are no residency requirements necessary for this type of refinancing. Investment properties will not be required to have an appraisal to qualify for a streamlined loan.
Homeowners that wish to take advantage of the FHA streamlined refinancing program should note that they are not required to perform this refinancing with their current bank. Any FHA approved lender can complete this type of transaction for the homeowner if they qualify for the program.
It is probably in the best interest of the homeowner to shop different lenders and see what interest rates and fees each are charging. The mortgage market has become very competitive, and with a little bit of research, a lot of money can be saved.
Taking advantage of this type of refinancing is very cost-effective for the homeowner. A reduction in interest rates, as little as 1 percent, can save them thousands of dollars during the remainder of their loan. The reduction in interest will also reduce the monthly obligation on the loan.