Both the USDA and FHA mortgage programs have a “streamline” refinance feature. As the name implies, the streamline requires much less documentation from the borrower, especially when compared to the amount of paperwork needed to approve the initial loan. When applying for a new USDA or an FHA loan, you can expect to provide at minimum:
- Completed loan application
- Most recent pay stubs covering 30 days
- Recent bank and investment statements (all pages)
- Signed disclosures and authorization forms
- Name and contact for insurance coverage
- Funds for loan application or appraisal fee
- Income returns for past two years
- Year to date profit-and-loss for the self employed
Once this paperwork was delivered, the lender would then gather this information along with other documentation from third parties such as a title report and flood certifications for instance. Typically the loan process lasted less than 30 days. Yet with the streamline program, the large bulk of this paperwork is eliminated.
The FHA streamline refinance program allows you to refinance the existing loan to a new FHA loan. The streamline must be “FHA to FHA.” What are the features of the streamline and what paperwork is eliminated?
First, you can forget about providing pay check stubs or W2 forms. The FHA streamline program does not require verification of employment or income when evaluating an FHA streamline application. This can literally mean you don’t even have to have a job this time around. For the self-employed, there are no income tax returns required. Literally, income and employment are left out of the equation here.
Second, you don’t need an appraisal. Not only does that save money but it also saves time. Instead of using an appraisal to establish a value, the lender approving an FHA streamline application uses the home’s original purchase price. This means someone can owe more on their home than it is currently worth.
Finally, there are no credit score requirements for an FHA streamline. Any level of credit can work with this program, regardless of any current credit score. However, there can be no more than one payment made within the previous 12 months that was more than 30 days past the due date and absolutely no such late payments within the previous three.
The streamline program figures that if you can make your mortgage payment time, then a lower rate would only make things easier. In fact, the FHA streamline requirement means the monthly payment must be reduced by at least 5.00% or you are refinancing from an adjustable rate mortgage or hybrid into a fixed rate loan.
USDA Streamline Refinance
There are currently two types of “streamline” USDA refinance programs. One is currently called the “pilot” program because it is available in a limited number of states, 34 to be exact. The pilot program has been such a success that most think it’s a matter of time before the program is made available to all 50 states.
The current USDA streamline loan requires less documentation compared to the initial USDA loan used to purchase the property. The current streamline doesn’t require an appraisal but the new loan can’t exceed the old one. Otherwise, required documentation includes pay check stubs and W2 forms. When compared to the FHA streamline refinance, it really not very streamlined after all.
However, the USDA pilot streamline refinance program mimics the FHA streamline. The pilot program eliminates the need to calculate debt to income ratios. That means no pay check stubs or income verification is required. Nor are credit scores needed and you can roll your closing costs into the loan.
The USDA pilot refinance program only offers a 30 year fixed rate and the new rate must be lower than the existing one. The USDA pilot refinance requires you to still occupy the property and have zero late payments made within the previous 12 months.
When comparing the FHA streamline with the USDA pilot refinance program, they’re very nearly the same. The goal for each is to make the new loan better than the previous one in terms of risk and affordability.