FHA streamline refinance, and when to leave FHA instead

If you have an FHA loan and rates have come down, the FHA streamline refinance is the shortest road to a lower payment: no appraisal, and in its simplest form no income or credit qualifying. It also has rules people get wrong, starting with the half-point test, and it never removes your mortgage insurance. Here is how it works, what the MIP math looks like, and when leaving FHA beats it.

How does an FHA streamline refinance work?

A streamline replaces your FHA loan with a new FHA loan at a lower rate, with far less paperwork than a regular refinance. It comes in two versions:

• Non-credit qualifying: no credit or income analysis and no appraisal. This is the one most people mean by “streamline.”
• Credit qualifying: a full credit and income review, still with no appraisal.

Either way, the point is to capitalize on the rate reduction. It is not a way to take cash out; that is the FHA cash-out refinance, which has its own limits on the cash-out refinance page. Veterans have a close cousin in the VA IRRRL. When you apply, send your latest mortgage statement as a PDF, not screenshots. The underwriter needs the whole document.

FHA streamline refinance requirements

Seasoning is measured on the day the new FHA case number is assigned. You cannot speed it up by paying ahead; the clock counts payments and days, not dollars.

The net tangible benefit test counts your MIP

FHA does not compare interest rates alone. It compares the combined rate: your interest rate plus your annual MIP rate. Going fixed to fixed, the new combined rate must be at least 0.5 point below the old one. Moving from a fixed rate to an adjustable one, it must be at least 2 points below.

Passing FHA’s test is the floor, not the decision. I still run the same break-even I use on every refinance, covered in when to refinance.

The upfront MIP refund rewards streamlining sooner

FHA loans pay an upfront MIP of 1.75% of the base loan, usually financed into the loan. Refinance FHA to FHA within three years and part of that premium comes back as a credit against the new one. The refund starts at 80% in the first month and drops 2 points a month until it runs out after month 36.

The refund is subtracted when the new loan is sized, and the new upfront premium is added on top. In the example loan below, the new premium is about $5,062, so a streamline at month 12 adds about $2,119 instead of the full amount. One exception: a streamline of an FHA loan endorsed on or before May 31, 2009 pays 0.01% upfront and 0.55% a year.

What an FHA streamline saves

The refinance break-even calculator runs the same test on your own numbers; add the MIP to each payment, since it is part of what you are paying to borrow.

Is an FHA streamline really “no closing cost”?

No refinance is free. A streamline advertised as costing nothing at closing pays those costs with a lender credit, which means a slightly higher rate than you could get by paying them yourself. Ask for both versions, and check that the higher-rate version still clears the 0.5-point test.

In my files, lender credits usually cover most of the costs, and the borrower brings roughly one month’s payment to fund the new escrow account and prepaid interest. The old escrow balance comes back as a refund after payoff, and closing before your next due date means no payment goes to the old servicer that month, so most of that cash finds its way back. None of it is a gift: the interest for that month is inside the payoff.

Why some FHA loans shed MIP and others never do

How long you pay annual MIP was decided the day you bought, by how much you put down. If you borrowed 90% of the value or less (10% or more down), MIP runs for 11 years. Borrow more than 90% and it runs for the life of the loan, until you refinance, sell or pay it off. On a 30-year FHA loan for a one-unit home in the Richmond area, the annual rate is 0.55% with less than 5% down and 0.50% with 5% or more.

I have seen buyers land a few hundred dollars short of that line. If you are buying with FHA and anywhere near 10% down, count it to the dollar before you sign. The full mortgage insurance rules are on how PMI and FHA MIP come off.

For a refinance, the line tells you which door you have. Borrowed more than 90%? MIP never ends on its own, so a conventional refinance is the only way out short of selling or paying off. Put 10% or more down? Your MIP ends at year 11 anyway, so let the rate math decide. A streamline is a new FHA loan, so ask how its MIP term is set before you streamline a loan that is close to year 11.

When FHA to conventional wins

A conventional loan needs no mortgage insurance at 80% of value or less, and any PMI it does carry comes off automatically when the payment schedule reaches 78% of the original value, as long as you are current. FHA’s MIP does not follow those rules. That is the case for leaving FHA, and equity decides when it works; FHA vs conventional compares the two programs in full. In my files, a conventional refinance with less than about 25% equity takes pricing hits that often make the streamline cheaper, even with the MIP, and conventional rates tend to run higher than FHA rates to begin with.

At 25% equity, the conventional loan wins by $96 a month over the streamline and the mortgage insurance is gone for good. Lower the value to about $353,000, 85% of value, and the conventional loan needs PMI, about $50 to $70 a month on published rate cards at 740 and 680 credit scores, on top of the pricing hits. That is where the streamline usually wins.

The streamline is the easiest refinance there is, which is exactly why it gets oversold. Pass FHA’s test, then pass the break-even, and check whether this is the refinance that should finally take you off FHA.