FHA Streamline Refinancing: The Net Tangible Benefit

September 11, 2012

If you are looking to refinance an existing FHA mortgage with an FHA Streamline Loan, there are some details you should know when planning for the loan application. FHA Streamline Refinancing loans have a set of requirements connected to the loan's benefit to the borrower; these rules will directly affect the borrower's eligibility to be approved for an FHA Streamline mortgage.

To get FHA approval for a Streamline Refinancing loan, there must be a "net tangible benefit" to the borrower as a result of the new loan.

What does "net tangible benefit" mean? Here are specific definitions which must be met in order to qualify. In the reference HUD 4155.1 Chapter Six, Section C, FHA rules do say certain exceptions may be permitted in the right circumstances, but in general:

"The lender must determine that there is a net tangible benefit to the borrower as a result of the streamline refinance transaction, with or without an appraisal. Net tangible benefit is defined as:

A 5% reduction to the principal and interest (P&I) of the mortgage payment plus the annual mortgage insurance premium (MIP)

or

Refinancing from an Adjustable Rate Mortgage (ARM) to a fixed rate mortgage."

These rules don't stop there. Additionally:

"To qualify as a net tangible benefit, the new mortgage payment (P&I plus MIP) must be at least 5% lower (emphasis ours) than the mortgage payment of the loan being refinanced."

The FHA adds:

"This requirement applies when refinancing from

-- fixed rate to fixed rate
-- ARM to ARM
-- Graduated Payment Mortgage (GPM) to ARM
-- GPM to fixed rate
-- 203(k) to 203(b), and
-- 235 to 203(b).

Some borrowers will ask, but unfortunately a simple reduction in the loan term is not considered a net tangible benefit--there must be another benefit to the borrower as a result of the new loan. FHA loan rules also add, "When refinancing to a hybrid ARM, lenders must treat the new hybrid ARM as a fixed rate mortgage."

In light of these rules, you may not feel certain whether you need streamline refinancing or credit-qualifying FHA refinancing--discuss your options with the lender. Be sure to ask about the differences between the two loan programs and which FHA refinancing loan may be right for you.