December 19, 2011
One recurring question in the reader comments section as of late involves the rules of cash-out refinancing loans and streamline refinancing loans insured by the FHA.
Some borrowers seek loans on property that no longer has a mortgage, and wonder if FHA refinancing loans can help. Borrowers looking at options including FHA cash-out refinancing or streamline refinancing learn there are important differences between the two.
FHA streamline loans require the home to have a lien, otherwise there is no loan to refinance. Without an existing mortgage, there’s no possibility an FHA streamline loan can be underwritten for that property. For example, in the HUD.gov frequently asked questions section, under the heading, “Streamline Your FHA Mortgage”, the site states;
“FHA has permitted streamline refinances on insured mortgages since the early 1980’s. The “streamline” refers only to the amount of documentation and underwriting that needs to be performed by the lender, and does not mean that there are no costs involved in the transaction. The basic requirements of a streamline refinance are:
The mortgage to be refinanced must already be FHA insured.
The mortgage to be refinanced should be current (not delinquent).
The refinance is to result in a lowering of the borrower’s monthly principal and interest payments.”
When it comes to cash-out refinancing, FHA rules state “The property must be owner-occupied. Non-owner occupant co-borrower may not be added in order to meet FHA’s credit underwriting guidelines….Properties owned free and clear may be refinanced as cash-out transactions.”
Based on that reading of the FHA rules, a borrower does not need an existing lien on the property in order to apply for FHA cash-out refinancing. This is especially helpful for those seeking refinancing on property they acquired through inheritances.
In such cases, the rules state, “Properties acquired by inheritances within the past 12 months are eligible for a cash-out refinance transaction provided they have been occupying the property as their primary residence since the inheritance. The lender must document the acquisition by the borrowers via inheritance.”
FHA rules in this area may differ from individual bank policies–check with your lender to see if cash-out refinancing under such circumstances is permitted.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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