The FHA streamline refinance program allows a borrower with a current FHA loan to refinance into a lower rate and payment with very little time, effort, or documentation.

But for a borrower to qualify, FHA states that there must be what’s called a “net tangible benefit” or “NTB.”  That means the lender must prove that the streamline refinance is in the borrower’s best interest.

The problem is, many applicants are satisfied with their proposed monthly savings, but don’t meet the NTB rule. For instance, a borrower’s payment is $2,500 per month. The FHA streamline would drop the payment to $2,400 per month. Yet, the borrower does not qualify because the new payment would have to be $2,375 per month — 5% lower than the current payment.

But there may be a way to adjust the loan so that it’s within NTB guidelines. Let’s look quickly at what qualifies as a “net tangible benefit” and look at ways to make your loan fit these parameters.

Net tangible benefit 5% payment reduction

FHA defines a net tangible benefit as the mortgage payment dropping by at least 5%. The reduction must factor in principal, interest, and mortgage insurance.

For example, a borrower currently has a 30-year fixed note rate at say 5% on a $200,000 loan. The principal, interest, and monthly mortgage insurance payment (not including taxes and insurance) would be $1,164.

In order to qualify for the reduced documentation streamline loan, the payment must drop by 5% to $1,105. If not, the loan will not qualify for the streamline refinance.

Beware of mortgage insurance increases

One hangup on the FHA streamline net tangible benefit rule is the potential increase in mortgage insurance. FHA has increased its premiums over the years, which means that if you refinance, there’s a chance your FHA mortgage insurance could increase.

In past years, FHA had a mortgage insurance premium of 0.55% per year. Now it’s at 0.85%. Though FHA recently reduced its MIP, it’s still higher than it’s lowest historical levels.

If you refinance, there’s a chance your monthly mortgage insurance could increase from about $92 per year up to $141 per month on a $200,000 loan. While the interest rate savings more than make up for the MIP increase, your overall payment might not meet the required 5% payment reduction.

ARM to fixed-rate net tangible benefit

In some cases you may qualify for a streamline refinance even if you don’t meet the 5% reduction rule. FHA considers it a net tangible benefit if you convert an adjustable-rate mortgage (ARM) into a fixed rate. But this only applies if your ARM is past its initial fixed period and is in its adjustable period.

For instance, if you received a 5/1 FHA ARM 6 years ago, the fixed period is over. Now that your ARM loan is adjusting consider converting it to a 30-year FHA fixed rate loan to avoid the Net Tangible Benefit rule.

Reduction in term is not a net tangible benefit

Some borrowers may want to change their loan term from a 30-year fixed to a 15-year, or a 15-year to a 30-year. Unfortunately, FHA does not consider this an eligible net tangible benefit. The payment still must drop by at least 5% to qualify for the FHA streamline program.

But if you’re changing from a 15-year fixed to a 30-year fixed, chances are that your payment will be dropping fairly significantly and will probably meet the 5% reduction rule.

How to qualify despite the FHA net tangible benefit rule

1. Negotiate a lower rate. Ask your lender how much your rate has to drop to meet the requirements. Request a fee quote on that rate. If the costs to obtain that rate are too high, ask the lender to credit some of the difference.

2. Wait for a better rate. Wait to lock the loan until favorable rate conditions exist. If you can lock in on a positive rate swing, it may reduce your proposed payment just enough.

3. ARM to Fixed. Convert your ARM, which is in its adjustable period, into a fixed-rate loan. In most cases, this is considered a net tangible benefit. If your ARM loan is still in its fixed period (typically the first 5 years), your payment still needs to drop by 5%.

4. Fifteen years to thirty. If you are currently in a 15-year FHA loan, consider converting it into a 30 year to meet the 5% reduction rule. This will drop your payment. Just beware that your loan term will be extended quite a bit.

5. Shop around. If your lender is unwilling to help you reduce your rate enough, call around to other lenders. One might be willing to give you a low enough rate to make your refinance work out.

NTB requirement too restrictive?

It may seem that the net tangible benefit rule only blocks people from refinancing. But it’s a consumer protection item put in place by the FHA. Mortgage loans have closing costs and in addition, FHA loans require mortgage insurance which can make the loan more expensive to the borrower.

Lenders make money by making loans but if it’s not in the best interest of the borrower then a lender shouldn’t make the mortgage. Having the net tangible benefit rule in place ensures the borrower that a refinance is probably a good idea and the lender is making the lending decision in the borrower’s absolute best interest.