The idea behind the FHA streamline refinance is to help borrowers obtain a loan that will benefit them more than the loan they are in. This is why the FHA requires a net tangible benefit in order to qualify for the loan. It is not enough to show that you made your last 12 months’ worth of mortgage payments on time or that you have stellar credit or even that your property value went up – the FHA needs to know that there is ample benefit in you taking on a new mortgage, essentially because this means that you will be starting over again on the term of your loan. In fact, even lowering the term of your mortgage, say from a 30-year mortgage to a 15-year mortgage, is not enough of a benefit. The net tangible benefit has to meet one of the strict criteria that the FHA has set.
The Real Net Tangible Benefits
The real net tangible benefits that the FHA sees as a good enough reason to refinance include:
- A lower payment, but not just by a little bit – you must be able to prove that your new payment with the principal, interest, and new MIP will be at least 5% lower than your current payment.
- Refinancing from an ARM to a fixed rate loan is another reason; however, you still have to prove that your payment will be at least 5% lower with the principal, interest, and MIP in order to qualify.
Things to Watch For
Sometimes, even though your interest rate is decreasing, your payment might not decrease enough to hit that 5% rule. This is usually because of an increase in MIP. The rates for the mortgage insurance premium have increased throughout the years, so if you originated your FHA loan a few years ago, the new MIP rates might put your payment over the 5% decrease threshold, forcing you to be ineligible for the program.
Exceptions to the Rule
If you are refinancing from an adjustable rate mortgage into a fixed rate mortgage, you might be able to get around the 5% payment reduction rule. The only way to do this is to refinance after your initial adjustment period begins. If you are out of the fixed rate period and are now in the annual adjustment period, you can refinance into a fixed rate loan without the 5% rule, giving you a little more leeway in your quest to refinance.
Another exception to the rule is if you refinance from a 15 or 20-year term into a 30-year term. This is not a common scenario, but if you need lower payments, you will get them by extending the term. This new payment will meet the 5% rule by default, enabling you to take advantage of the FHA streamline refinance program.
Getting Around the Payment Requirement
If you really want to refinance with the streamline program, you can find a way to get around the 5% rule either by shopping around with several lenders until you find one that gives you the interest rate that will lower your payment enough or by negotiating the rate with one particular lender. There are ways to get your interest rate lower than what the lender quotes you, especially if you have compensating factors or you can afford to buy the interest rate down.
Overall, the FHA streamline refinance is a great way to lower your payment and get favorable terms on your mortgage. If you find that you have difficulty qualifying for the loan because of the 5% rule, talk to your lender to see what you can do to work around the requirement. Oftentimes there are ways to get through and get the streamline program you desire.