What is a Streamline Refinance?

Anyone who has taken out a mortgage loan can attest the underwriting process often requires lots of credit documentation from the borrower, the completion of multiple reports from the underwriter, a list of closing costs, and patience. With a streamlined refinance, however, the process may move faster because there is less documentation, underwriting, and paperwork required, which can also contribute to less expensive closing costs.

In order to qualify for a streamline refinance, your original loan must have been backed by one of three government agencies: the Department of Veteran Affairs (VA), the U.S. Department of Agriculture (USDA), or the Federal Housing Administration (FHA), and you must refinance with a loan backed by the same agency. Let’s explore.

What is a Streamline Refinance?

A streamline refinance is when a borrower refinances their original government-backed first mortgage through a process that requires minimal underwriting and no home appraisal. Streamline refinances must use a loan backed by the same government entity that backed the original mortgage.

There are three types of streamline refinances:

• The FHA Streamline Refinance
• The VA Interest Rate Reduction Refinance Loan (IRRRL)
• The USDA Streamlined Assistance Refinance

The FHA Streamline Refinance

The FHA streamline refinance can be used to refinance an existing FHA loan. In order to complete a streamlined refinance:

• The borrower can’t cash out more than $500 from their home equity.
• The new loan must result in a net tangible benefit to the borrower.
• The property can’t be an investment property unless the borrower is a HUD-approved nonprofit, a state or local government agency, or an instrumentality of the government.

Lenders can offer an FHA Streamline Refinance through credit-qualifying and noncredit-qualifying options, as well as a “no cost” option (which is not actually free).

• Credit-qualifying option: This requires the borrower to provide income and credit documentation, and the lender conducts a credit check.
• Non-credit qualifying option: In this case, the lender does not perform a credit check. Choosing the non-credit qualifying option could result in a higher interest rate than the credit-qualifying option, depending on the lender.
• No-cost streamline refinance: This is where the borrower finances their closing costs by including them in the loan amount. They won’t pay anything out-of-pocket at closing, but they will pay the closing costs (including interest charges) as part of their monthly mortgage payment.

Features of an FHA streamline refinance include:

• No FHA mortgage limits
• No requirements for homeownership counseling

The VA Interest Rate Reduction Refinance Loan (VA IRRRL)

The VA IRRRL is a streamline refinance for existing VA-backed loans. The purpose of this type of refinance is to lower the borrower’s interest rate to make their monthly mortgage payments either more affordable or, if the borrower is trying to replace an adjustable rate mortgage with a fixed-rate mortgage, more stable.

If the borrower’s original VA-backed loan was a no-down payment loan, they can borrow up to the Fannie Mae/Freddie Mac conforming loan limit for their new loan. If the borrower lives in a high-cost area, they may be able to borrow more. In addition, borrowers that want to put forth a down payment may be eligible for higher loan amounts.

In terms of closing costs, borrowers can choose to:

• Pay for these out-of-pocket.
• Finance the closing costs by including them in the loan amount.
• Ask their lender about a no-cost mortgage loan that charges a higher interest rate in exchange for the lender paying for the closing costs themselves.

Features of this streamline refinance include:

• No credit review or financial underwriting requirements
• No specific limits on cashing out home equity

The USDA Streamline Assist Refinance Loan

This type of streamline refinance is for existing USDA-backed and direct home mortgages that are secured by the borrower’s primary residence. The refinance must result in at least a $50 net reduction in the borrower’s total monthly payment, which may include: principal and interest payment on the loan, real estate taxes, and homeowner’s insurance. Borrowers can pay for closing costs upfront or they can finance them by including them as part of the loan amount.

Features of this streamline refinance include:

• Appraisal requirements only for USDA direct borrowers
• No credit check requirement
• No home inspection requirement
• No limits on debt-to-income ratios

The Benefits of Streamline Refinance Loans

These are the benefits of the streamline refinance process:

Speed and Complexity

Arranging a streamline refinance is often quicker and easier than the traditional or conventional home mortgage process. This is because the level of documentation required from the borrower is lower than other types of refinance loans, and there typically aren’t as many required reports.

Cost Savings

Closing costs for streamline refinances tend to be lower than for traditional or conventional home mortgage refinance loans.

No Appraisal Contingencies

Since appraisals aren’t required for a streamline refinance, borrowers don’t have to worry about what their home will appraise for and how that value will affect their approved loan amount.

Flexible Credit Requirements

Many streamline refinancing products don’t require credit report checks or debt-to-income ratio calculations, which means borrowers whose financial or credit score information has changed can still maintain eligibility.

Eligibility Requirements for a Streamline Refinance

The eligibility requirements are a little different for each of the three types of streamline refinance loans.

FHA Streamline Refinance Program

• Borrowers must have made at least six mortgage payments on their original loan.
• Borrowers must be current on their mortgage payments.
• The refinance must result in a net tangible benefit to the borrower, such as lower monthly payments.
• Owner-occupied and nonowner-occupied investment properties are eligible for this program.

VA IRRRL Streamline Refinance

• Borrowers must currently live in the home being refinanced or be able to certify they once lived in the home.
• If borrowers have a second mortgage, the lender on the second mortgage must agree to the new loan maintaining a first mortgage position.
• The new loan must charge a lower interest rate than the original loan (unless the original loan is an adjustable-rate mortgage).
• The monthly mortgage payments on the new loan must be lower than they are on the original loan, unless certain conditions apply.

USDA Streamlined Assistance Refinance

• Borrowers must have made on-time payments for the previous 12 months.
• The borrower’s annual income can’t exceed the annual income limit for the geographic area.
• Properties that were eligible when the original loan was made, but are no longer located in an eligible rural area, remain eligible for a USDA streamline assistance refinance.
• The interest rate on the new loan can’t exceed the interest rate on the original loan.
• The home must be the borrower's principal residence.

How to Apply for a Streamline Refinance

You can apply for an agency-backed streamline refinance through a participating lender. Each agency and lender may have slightly different application requirements and processes.

• For FHA-backed loans, check this list for approved lenders.
• To find lenders approved to issue VA-backed loans, put VA IRRRL lender into a quick internet search. Borrowers will need to produce their original Certificate of Eligibility (COE). If they don’t have their original COE, they can ask the lender to get their COE electronically from the VA Home Loan portal.
• For USDA-backed loans, check this list for approved lenders.

3 Things to Consider Before Choosing a Streamline Refinance

A streamline refinance can result in a lower rate on your loan, lowering your monthly mortgage payments and the amount you’ll pay in interest over the life of your loan. But these loans come with some restrictions and fees that may not work for your situation. Here are three factors to consider before deciding whether a streamline refinance is right for you:

1. Lower Interest Rate vs. Longer Loan Term

Your streamline refinance can result in a lower interest rate and monthly mortgage payment. But the required loan term on the new mortgage may also be longer than the loan term you have remaining on your current mortgage. This means it may take you longer to pay off your home mortgage if you decide to do a streamlined refinance than it would if you kept your current loan.

2. Closing Costs vs. Savings

Since you are taking out a new loan, there will be closing costs involved, including loan guarantee fees that are paid to the backing government agency. In order to evaluate whether the streamline refinance is financially advantageous to you, you can divide the total closing costs and fees by how much you’ll save each month by refinancing.

3. Mortgage Insurance Premiums

If you have less than 20% equity in your home and you refinance with a conventional loan, you will have to pay for mortgage insurance. This may add to the overall cost of your loan.

The Bottom Line

A streamline refinance can be a quick and affordable way for a homeowner to refinance a mortgage for a lower interest rate or another benefit, as long as the cost savings will exceed the closing costs.

Unsure if a streamlined refinance is right for you? Reach out to a Mortgage Advisor who can help to guide your decision.