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The low-doc refinance program for government mortgages

FHA, VA and USDA mortgages are more popular than ever.

But homeowners with these loan types aren’t refinancing nearly as much as those with conventional loans.

That seems strange, given that government-backed mortgage rates are lower.

And homeowners with FHA, VA, and USDA loans can use the streamline refinance — a faster and often cheaper way to lower your rate.

So why don’t more homeowners use this strategy? And does a streamline refi make sense for you?

Verify your streamline refinance eligibility (Aug 25th, 2020)

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Benefits of a streamline refinance

A streamline refinance is a speedy, uncomplicated way to refinance a government-backed mortgage, explains Brian Martucci, a finance expert with Money Crashers.

Streamline refinances are available for homeowners who currently have:

  • FHA mortgages
  • VA mortgages
  • USDA mortgages

And this program has unique benefits.

“A conventional refinance typically takes longer than a streamline or low-doc refinance because it involves more paperwork and an appraisal,” says Martucci.

“With a streamline refi, a new appraisal is usually not required. And you probably don’t have to provide credit and income documentation like you would with a conventional refi,” he contiunues.

“A streamline refinance loan is faster, has lower minimum requirements, and involves typically only service-level processing” –Dennis Shirshikov, Real estate analyst

Dennis Shirshikov, a real estate analyst, agrees.

“A conventional refinance loan is a lot like getting a mortgage. It requires a large amount of paperwork, inspection, and other checks to ensure that the property can still hold its value,” notes Shirshikov.

“A streamline refinance loan is faster, has lower minimum requirements, and involves typically only service-level processing.”

Verify your streamline refinance eligibility (Aug 25th, 2020)

FHA streamline refinance

Eligible FHA borrowers can pursue an FHA streamline refinance.

There are a few basic requirements to qualify for an FHA streamline refi.

  • You need to be current on your mortgage payments
  • The loan must be at least six months old
  • You’ll have to cover the closing costs and pay for mortgage insurance premium

Clifford Rossi, a finance professor at the University of Maryland, says the FHA streamline may also require a credit check and an assessment of your income and capacity to repay the loan.

But in some cases, even those minimal steps won’t be necessary.

“[Some] borrowers may be eligible for a non-credit qualifying loan that bypasses this assessment and enables them to gain a lower rate than the credit-qualifying version,” says Rossi.

Verify your FHA streamline eligibility. Start here (Aug 25th, 2020)

The VA streamline refinance (IRRRL)

Veterans, active service members and surviving spouses with existing VA loans can opt for an Interest Rate Reduction Refinance Loan (IRRRL). This loan is also known as the VA streamline refinance.

With the VA IRRRL, homeowners who have current VA loans may be able to refinance into a lower rate with minimal paperwork and no appraisal.

That said, lenders do set their own requirements. Some may require a credit check and appraisal. So ask about these policies before choosing a VA IRRRL lender.

As an added benefit, you can roll your closing costs into the new loan or accept a slightly higher interest rate to cover these costs.

So VA homeowners may be able to refinance with little or no out of pocket cost.

Verify your VA streamline eligibility. Start here (Aug 25th, 2020)

The USDA streamline refinance

For those with USDA rural housing mortgages, the streamlined-assist refi is a program that promises less paperwork and processing than a standard mortgage application.

You can benefit from significantly reduced fees and simplified eligibility requirements if you are an existing USDA borrower.

Unless you receive a subsidy during your loan term, you won’t need to get a new appraisal. No credit review is required either, but the lender must verify that your mortgage was paid for 12 months before your refi application.

To qualify for the USDA refinance, your new loan must have a monthly payment savings of at least $50, or $600 annually.

Verify your USDA streamline eligibility. Start here (Aug 25th, 2020)

Why aren’t more people using streamline refinances?

Government loans are still incredibly popular. In fact, Ginnie Mae reports that a record $70 billion in mortgage-backed securities were issued in July.

But amazingly, people with government loans aren’t refinancing at nearly the same levels as borrowers with conventional loans.

Ellie Mae’s origination report shows that in June:

  • FHA loans were 85% purchase and only 15% refinance
  • VA loans were 79% purchase and only 21% refinance
  • Conventional loans, on the other hand, were 32% purchase and 68% refinance

So, why are so many conventional borrowers taking advantage of record-low rates while those with government-backed loans arent?

There are several possible reasons.

1. Homeowners might not know about the streamline refinance program

Likely, one big reason homeowners don’t use the low-doc streamline refinance is simply that they don’t know about it.

“There has been little done to make people aware of the streamline refinance,” says Shirshikov.

“Unfortunately, most of the people that qualify for these loans are not out there learning about mortgage options regularly. Instead, they often rely on their bank representative to understand and inform them about these options,” he adds.

Streamline refinances are often easier to qualify for than traditional refis.

So if you hear about the program, it’s worth asking your lender whether you’d qualify for a lower rate.

2. Streamline refinances still have closing costs

Another reason why streamline refi activity isn’t higher may have to do with closing costs involved.

With an FHA streamline refi, for example, only the upfront mortgage insurance can be rolled into the loan. All other fees have to be paid on closing day.

“That’s a big turnoff for many borrowers,” says David Dye, broker/CEO of GoldView Realty.

It leaves just two options: “Either the borrower has to bring in cash to cover all those expenses, or the lender has to give the borrower a higher interest rate to cover the fees. A higher rate defeats the purpose of a refinance.”

Note: The VA streamline refinance (IRRRL) is more forgiving and allows most closing costs to be rolled into the loan.

3. Lower credit borrowers may have fewer refinance opportunities

Rossi points toward one other reason FHA refinance numbers in particular might be low.

“The credit profiles of FHA borrowers tend to be lower than for [conventional] loans,” he explains.

“As a result, FHA borrowers tend to refinance at lower rates… because those with better credit histories have more opportunities available from lenders.”

That said, some lenders don’t require a credit check for a streamline refinance.

Those with borderline credit should shop around for a lender that offers streamline reifnancing with no credit verification.

Refinance challenges during COVID

Of course, your refinance options will vary depending on your current loan, your equity, and the rate you’d qualify for.

And there are a few new challenges to keep in mind during the coronavirus era. These could complicate or lengthen the refinance process.

Many lenders are at capacity, so it can take longer to find a lender with low refinance rates and close on your loan.

“Lenders have had to adapt to the new reality of the coronavirus, as they have reduced on-site staffing and made other accommodations with customer-facing activities like mortgage application processing,” says Rossi.

“As a result, lenders and credit guarantors, such as FHA, are generally at full capacity to process applications.”

What’s more, credit requirements are tighter now than before the pandemic began.

“Tighter credit could affect [refinance] eligibility on the margins” Brian Martucci, Finance expert, Money Crashers.

“That means lenders aren’t as willing to underwrite new loans for less-qualified borrowers,” cautions Martucci.

“Fortunately, thanks to considerable federal guarantees inherent in FHA, VA and USDA mortgage programs, this shouldn’t result in widespread problems for borrowers eligible for a streamline refi. But tighter credit could affect eligibility on the margins.”

Do you qualify for a low-doc streamline refinance?

Don’t let the coronavirus or any of the aforementioned rules stop you from attempting to get a streamline refinance of your government loan.

To increase your chances of qualifying for a streamline refi, do your homework.

  • Check your three credit reports for free at AnnualCreditReport.com. Work to correct any errors or problems you see there
  • Check your credit score, often available for free through your bank or credit card company
  • Make sure you’re current on mortgage payments. Streamline refinance programs require you to bu current on your loan. Check your statements to make sure you don’t have late or missed payments

And remember, you don’t have to refinance with your current mortgage company.

You’re free to shop around for a lender with lower rates or more flexible requirements. It’s all about finding the best refi deal for you.

Verify your new rate (Aug 25th, 2020)