March 7, 2014
Recently we posted about FHA streamline refinance loan options. FHA streamline loans are for existing FHA mortgages and feature no money back to the borrower. That means there is no FHA-required credit check or appraisal, though the lender may require one.
FHA Streamline Refinancing rules as printed in HUD 4155.1 state that in most cases an FHA streamline refinance must result in a “net tangible benefit” to the borrower. What does this mean and how can a borrower know what those benefits will be?
HUD 4155.1 Chapter Six says, “The lender must determine that there is a net tangible benefit to the borrower as a result of the streamline refinance transaction, with or without an appraisal. Net tangible benefit is defined as
• a 5% reduction to the principal and interest (P&I) of the mortgage payment plus the annual mortgage insurance premium (MIP), or
• refinancing from an Adjustable Rate Mortgage (ARM) to a fixed rate mortgage.”
Borrowers with adjustable rate mortgages should know that refinancing from the ARM loan to a fixed rate conventional mortgage may result in a higher interest rate than the ARM has at the time of refinancing.
This is permitted under the FHA loan program, so it’s good to know this ahead of time–you won’t be penalized for trying to refinance from the lower-rate ARM to a higher interest rate (but more stable) fixed rate loan.
One thing borrowers should know is that the FHA does not consider reducing the length of the mortgage to be a benefit. According to Chapter Six, this is not a “net tangible benefit”.
Borrowers may find exceptions to the net tangible benefit rule when adding an energy efficient mortgage to the loan package, but increasing the FHA loan by too much will require a new credit application in many cases, depending on the lender and FHA loan rules.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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