FHA vs. FHA Streamline

Posted by Laine Smith on 4/23/15 10:15 AM

Topics: Home Buying

The Federal Housing Administration (FHA) is the largest insurer of residential mortgages in the world. It was founded by Congress in the 1930's in response to a rash of defaults and foreclosures. Since its creation, the FHA has helped 4.8 million families achieve homeownership by providing affordable and accessible financing to borrowers and adequate insurance for lenders, like Compass Mortgage.

FHA

Image courtesy of Salvatore Vuono at FreeDigitalPhotos.net

 What is an FHA Loan?

An FHA loan is sometimes referred to as a "first-time homebuyer's loan" though it is available to eligible repeat homebuyers, too. FHA loans are a great first-time homebuyers' loan because of various benefits, including:

  • Smaller down payment requirement. Buyers only need to provide 3.5 percent of the purchase price for a down payment, which can be gifted from a family member or grant from a state or local government down payment assistance program.
  • More flexible credit guidelines. Borrowers with low or bad credit, non-traditional or insufficient credit history, or have undergone bankruptcy or foreclosure may still qualify for FHA financing, pending multiple factors.
  • Competitive interest rate. FHA interest rates are extremely competitive and often lower than the conventional loan rates.
  • Higher seller contributions. FHA loans allow seller contributions of up to 6 percent, in comparison to conventional financing, which only allows 3 percent. FHA borrowers can negotiate to have their seller pay for most, if not all, of their closing costs.

Who is Eligible for an FHA Loan?

Apart from meeting the previously mentioned credit score and down payment requirements, there are a few other items that affect a borrower's eligibility for FHA financing, including:

  • FHA appraisal requirements. An FHA appraisal differs from an appraisal for a conventional mortgage. Among determining value, FHA appraisers must conclude that everything in the financed home functions as it is intended to before closing. Here is a general list of those requirements.
  • Front-end ratio. This refers to the amount of the borrower's mortgage payment, including property taxes, mortgage insurance, home insurance, and HOA fees, if applicable. The amount is measured as a percentage of the borrower's income and the maximum allowable percentage is variable, based upon other factors of the loan.
  • Back-end ratio. This refers to the amount of the borrower's mortgage payment, including the items mentioned above, and the entirety of the borrower's other debts, such as student loans, car payments and credit debt obligations. The amount is measured as a percentage of the borrower's income and the maximum allowable percentage is variable, based upon other factors of the loan.

What is an FHA Streamline?

The FHA Streamline is a mortgage product reserved for homeowners with existing FHA loans. This refinancing option is considered streamlined because it allows homeowners to reduce their interest rate on their current home loan quickly with the ability to bypass certain financing documents.

FHA Streamline refinancers benefit from the streamlined refinance process, because they:

  • Will NOT need a home appraisal
  • Will NOT need qualifying debt ratios
  • Will NOT need income verification
  • Are eligible for the new FHA private mortgage insurance rate reduction (if their loan term is 15 years or greater)

Who is Eligible for an FHA Streamline Refinance?

Although the FHA Streamline Refinance does allow homeowners to bypass traditional mortgage verifications of income, debt and home value, the program does enforce some minimum standards for applicants. You may be eligible for an FHA Streamline Refinance if:

  • Your home is currently financed with an FHA mortgage
  • The mortgage to be refinanced is current (not delinquent)
  • The refinance will result in a lower monthly principal and interest payment or, under certain circumstances, will convert an adjustable rate mortgage (ARM) to a fixed-rate mortgage

What Does It Cost to Refinance with an FHA Streamline?

FHA does not allow lenders to include closing costs in the new mortgage amount of a streamline refinance. Some lenders may offer a "no cost" option by charging a higher rate of interest on the new loan, allowing the borrower to avoid upfront closing costs.

For more information about home purchase financing, download our free Mortgage 101 Handbook. For information regarding refinancing your current home loan, refer to our free Refinancing Guide.

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