Guest Blogger: Streamline Refinance
What are some of the pitfalls that can cause a streamline refinance request to be rejected? What mistakes could cost you time or, worse, money?
1. Applying for the Wrong Type of Loan
The VA and FHA streamline refinancing loans don’t let you take cash out. Nor can you use the money to pay off a second or third mortgage. If you need to withdraw part of your home’s equity as part of the refinancing, don’t apply for a streamline loan; instead, apply for the FHA or VA cash-out refinance loan.
2. Failure to Shop the Loan
The VA and FHA both have lists of approved vendors for their streamline refinance loans. However, the vendors have significant freedom in how they handle loans. They can mandate minimum credit scores, whereas the FHA and VA general requirements don’t. Lenders have the option to waive or reduce mortgage fees. Interest rates vary between lenders. And don’t make the mistake of simply refinancing the mortgage with your current lender. Lenders under the FHA and VA streamline refinancing program should reuse paperwork like your prior COE and appraisal, even if they do not hold your current mortgage.
3. Look at the Overall Balance as Well as the Monthly Payment
Streamline refinance programs are not allowed to refinance your mortgage unless it reduces your monthly payment. The savings may come from a lower interest rate, lower mortgage insurance or both. However, you need to look at how much you will save over the life of the loan as well as the monthly payment. Could you save up for another few months and pay the closing costs / mortgage fees up front, so that the balance won’t increase when you roll in closing costs? Never make the decision to refinance based on interest rate alone.
4. Consider How Timing Would Affect Your Loan
Do you want to refinance now so that you won’t get stuck paying mortgage insurance longer, as the FHA is considering requiring of refinanced loans filed after June, 2013? Or will you get a better deal if you have paid longer on the house, getting the loan-to-value ratio down?
5. Verify That Your House is in Order
You don’t qualify for the loan if you have a past due balance on the mortgage or have missed any payments in the past twelve months. Save yourself time by checking your payment history and outstanding balance before you apply. The FHA, in particular, records when you are denied a loan, and you’ll have to explain the denial when you reapply later.
Have you refinanced your home before? Save yourself the time and trouble by verifying the date you last refinanced. You aren’t allowed to refinance the property again until at least 270 days have passed since the last mortgage refinance deal closed.
FHA lenders are being especially careful and rejecting applicants who are on the borderline. While the federal government backs FHA loans in case of default, the FHA is now financially penalizing banks that approve loans that the FHA later determines shouldn’t have been.
6. Know When Your Credit Will Get Checked
Most streamline refinance deals don’t require a credit check. However, some lenders in the FHA streamline refinance program do check your credit score. Find out which lenders do check your credit score. If you want to use a lender who does check your credit score, stop applying for new debt and start paying off existing debt before you apply for a refinance. And all lenders will check your credit score if you are refinancing a mortgage and removing someone who was previously on the mortgage.
7. Check the Approved Lender List Before You Apply
You need to check the FHA or VA approved lender list before you apply for a streamline refinance loan. Though these loans are backed by the government, there are lenders who no longer participate in the streamline refinance programs. They can, however, accept your application and offer you a conventional mortgage, which may have higher fees and hidden costs associated with it. Knowing who in your area offers streamline refinancing also helps you recognize lenders who mislead you and say that they are the only company that offers streamline refinancing mortgages in an effort to prevent you from shopping around.
Do your homework before you sign up for a streamline refinance. While it has less paperwork and closes faster, being rejected for the loan or signing up too fast could cost you over the long run. If you’re looking to refinance your home, check out our post on the Lower Costs of FHA Refinancing.