The FHA Streamline loan allows current FHA borrowers to refinance their loan with very little verification. The major premise of the loan is the lack of need for an appraisal. This allows even an upside down or a self-employed borrower to refinance and save money every month. Because the streamline loan requires borrowers to have an on-time mortgage history, the FHA feels lenders do not need an appraisal to allow borrowers to refinance and save money. Simply lowering the mortgage payment for borrowers with an on-time mortgage history already usually works.
Even as a self-employed borrower, you may be eligible for the FHA Streamline. You should know, though, that there are two types of streamline refinances – credit qualifying and non-credit qualifying. If you are a credit-qualifying self-employed borrower, you have some additional documents to provide.
What is a Non-Credit Qualifying Refinance?
A non-credit qualifying refinance is the simplest form of refinancing. You do not have to verify anything except your mortgage history and the current occupancy of your home. This means no credit report, appraisal, or verified income. You may only use this option if nothing on your loan changes with the exception of your payment, which must lower at least 5% in order to qualify. You can refinance from an ARM to a fixed rate or from a fixed rate into another fixed rate. You cannot:
- Change borrowers
- Have an increased payment that exceeds 20% of the current payment
- Assume the loan
If you do any of the above, you must use the credit qualifying streamline program. The non-credit qualifying program is the simplest form of refinancing.
What is a Credit Qualifying Refinance?
A credit qualifying streamline refinance is almost like a regular refinance. You must verify all of the following:
- Credit score/history
The only difference is you do not have to pay for a new appraisal. The lender can use the existing appraisal from the FHA purchase loan. In this instance, you may still be upside down on the loan; however, you must prove you can afford the loan. Lenders prefer this option for borrowers who may show some level of risk in regards to repaying the loan.
Assets are Always Verified
One thing both the credit qualifying and non-credit qualifying streamline refinance have in common is asset verification. The point of the streamline refinance is to lower your payment or make it a less risky loan. Because of this, you cannot take cash out of the loan. You may only include the outstanding principal balance plus any leftover upfront mortgage insurance after the lender figures in your mortgage insurance refund (if applicable).
Unless you negotiate for a no-closing cost refinance, there will be closing costs to pay out of pocket. In order to pay for them, you must verify your assets. The lender must see where the money comes from and determine that it is your money and not borrowed money. You cannot pay for the closing costs without going through this step.
Necessary Documents for Self-Employed Borrower
There are many reasons you may need a credit qualifying streamline refinance. Here are the most common:
- Mortgage payment increase of more than 20%
- Removing one or more borrowers from the loan
- Mortgage assumption
If you must verify your credit, income, and employment, there are certain things you will need as a self-employed borrower. These include:
- Tax returns for the last 2 years
- Letter from your CPA verifying your self-employment or copy of your business license
- Credit report
- Proof of on-time mortgage payments
The lender must then determine that you can afford the new payment resulting from the refinance. They do so by evaluating your credit score and history as well as your debt-to-income ratio. The only factor that doesn’t play a role here is the value of your home.
In this case, you must prove that you can afford the loan by showing a debt ratio around 31/43 and a credit score around 620. There are exceptions to the rule, but it varies by lender. For example, if you have a slightly higher front-end ratio of 33%, one lender might accept it while another right not. Being self-employed adds another layer of risk to your loan. A great compensating factor to add to the equation is stable self-employment. The longer you are self-employed, the less risky your income. If you can show a consistent pattern of income and plenty of experience in the industry, a lender will be more likely to approve your loan.
Mortgage Payment History Requirements
Whether you apply for the credit qualifying or non-credit qualifying streamline refinance, you have certain mortgage payment history requirements you must meet. The guidelines that pertain to you depend on how long you have had the loan:
- If you had the loan for fewer than 12 months – Every loan payment must be on time for the duration of the loan
- If you had the loan for more than 12 months – You may have one 30-day late payment within the last 12 months. However, it may not be within the last 3 months. The last 3 months must have a perfect history.
No matter if you apply for a credit qualifying or non-credit qualifying streamline refinance as a self-employed borrower, make sure to shop around. Every lender has a different threshold for risk. Once you have a few lenders willing to approve your FHA streamline loan, consider their offers. Chances are that each lender has a different interest rate to offer. They may even have different fees. Comparing your options side-by-side can help you make the right decision for your mortgage payment. When you consider the fact that your mortgage affects the next 15 to 30 years of your life, it makes sense to take your time and shop around. This is especially important if you are self-employed – many lenders look at this as a high-risk situation and may charge you accordingly. Make sure you know all of your options!