FHA streamline refinance transactions are a somewhat uncomplicated process to go through. The idea of the program is to provide FHA loan holders with the chance to refinance their loan into one with a lower rate, therefore, making the loan more affordable. As is the case with any loan program, there are restrictions for the program, including the subordinate financing that is allowed when you use the streamline program.
The idea behind the streamline program is not to provide any cash out, the maximum loan amount is based on the outstanding principal balance, plus any interest charged on the current loan, and the upfront MIP charged, minus any refund that you are eligible to receive. This means that any subordinated liens cannot be paid off with the streamline program. You must get the 2nd mortgage lienholder to subordinate the loan again in order to proceed. Typically this is not an issue since the mortgage company already holds 2nd lien position and it puts them in a better position to continue being paid on time if you lower the interest rate on your first loan.
New Subordinate Financing
If you wish to take on new subordinate financing during the FHA streamline transaction, you will have to prove the reason that you are taking out the new mortgage is for one of the following reasons:
- Bring down the principal balance of the current FHA 1st lien
- Pay the closing costs and other lender fees charged in FHA streamline refinance transactions, such as origination or discount fees
You cannot take out new subordinate financing at the same time that you are going through the FHA streamline refinance process in order to make any changes to your home, pay off debt, or use any other reasons to take cash out of your home. You will have to do that at a later time after refinancing the first mortgage if you wish to lower the interest rate on your FHA loan.
Taking Advantage of the FHA Streamline
The FHA streamline refinance program has many advantages. If you are considering taking out a 2nd lien, but need to do so in order to take cash out of the property for reasons other than above, it is best to wait until after your streamline refinance transaction takes place. The advantages of the streamline program include:
- Lower interest rate
- No appraisal required with most lenders
- No income doc requirements with most lenders
- No credit score requirements with most lenders
Basically, you can save money every month on your 1st mortgage without re-verifying anything. There are not any other loan programs that will enable you to refinance so easily, so it makes sense to hold off on any other financial transactions until you get your 1st lien payment lowered, this way you can have more disposable income, and a higher likelihood of getting approved for that 2nd lien which will likely be considered a cash-out transaction and have harsher requirements that include higher credit scores and lower debt ratios.
Every lender has different requirements when it comes to FHA streamline refinance transactions, but one that the FHA holds them to is the subordinate financing rules. There are no ways around this rule, so you must follow them to the “T.” If you already have subordinate financing, start working with the 2nd lienholder early on in order to get the approval to subordinate the financing again. This process can take a while depending on the lender, so it pays to start early in an effort to ward off any issues that might come your way during the process.