The FHA streamline refinance allows borrowers to reduce their rate with no pay stubs, no W2s, and no appraisal. But is an FHA streamline possible while simultaneously removing a borrower from the home loan?
For instance, what if you’ve gone through a divorce since you purchased your home? Or, you bought a home with a friend or relative who now wants to be removed from the loan. Worse yet, what if your spouse passed away recently?
The short answer is yes, you can remove a borrower from your current FHA loan while refinancing with an FHA streamline. However, you’ll need to meet some guidelines to make it happen.
Removing a borrower with an FHA Streamline Refinance
If you have a loan backed by the Federal Housing Administration, there are two FHA streamline refinance options: those that require re-qualification of income, and those that do not.
A standard FHA streamline refinance in which no borrowers are removed does not require the applicant to prove current income to get a new loan. This type of refinance might not even require a credit check! However, that’s not always the case when a borrower is removed.
But if you’re planning to remove another homeowner from the loan, there can be a few more steps involved.
There is a cost associated with an FHA streamline refinance. You’ll need to pay closing costs on the loan amount. But you won’t necessarily need to pay them upfront. You may be able to roll them into your mortgage — and if rates have dropped since you bought your home, it’s likely the net tangible benefit will offset this cost anyway.
And an FHA streamline refinance won’t allow you to liquidate any of the equity in the home. For that, you’ll need a cash-out refinance.
Situations in which income re-qualification is required
The household income can change when a borrower is removed and your mortgage lender will want to know that you’re still able to repay the loan balance. The remaining borrower must re-qualify if he or she has not made payments alone on the current mortgage for at least six months. More specific circumstances that require income re-qualification for a mortgage refinance are as follows:
- When removal of the borrower is considered a home sale. Some mortgage lenders require mortgage notes that state if a borrower is removed, the loan must be paid off. In this case, the remaining borrower must prove income.
- When the removal of the borrower is not related to divorce, legal separation, or death.
- You assumed the FHA loan less than six months ago.
- You otherwise acquired the home and FHA loan less than six months ago, but it was not considered a sale. This happens in cases of divorce or the death of a co-borrower.
In these cases, removing a borrower from the loan and title are allowed, but the remaining borrower must prove they can still afford the payment.
No income verification borrower removal
You can remove a borrower without submitting income documentation to re-qualify. In general, you must remove the borrower from the title and show your payment history to prove you have made at least six monthly payments from your own funds, without the help of the removed borrower.
- You assumed the home and FHA loan more than six months ago and can document you made all the monthly mortgage payments from your own funds.
- Your co-borrower was removed from title due to divorce, legal separation, or death.
- You can document the situation with a divorce decree or similar document legally awarding the remaining borrower with the home and responsibility for the payment.
If you make at least six mortgage payments on your own, you will have an easier qualification process when removing a co-borrower with the FHA streamline refinance.
Advantages of an FHA Streamline Refinance
If you have an FHA loan, an FHA streamline is the quickest way to take advantage of today’s low rates. Even if you recently removed a borrower from the title, it’s still very possible you will qualify for a lower interest rate and payment with a new mortgage.