Is the FHA streamline mortgage refinance really free or a scam?

The FHA streamline refinance is a program that allows borrowers, with FHA loans, to lower their mortgage payments and bypass many of the requirements that are assessed for new loans. The logic behind the reduced requirements is simple. FHA streamline refinances do not allow borrowers to increase the loan balances, so giving the borrower a lower mortgage payment creates no additional risk for FHA or the lender. Now that leaves the first question.

How is the FHA streamline refinance free?

Under the Real Estate Settlement and Procedures Act (RESPA) all refinance transactions require that the title companies review the files and pay all of the required municipal fees at closing. Even if a lender waives their fee (Ex. no closing cost loans), the title company and local recording fees must still be paid in order to complete the transaction. Although many lenders promote the FHA streamline as being a FREE loan, there are actually no free refinance transactions. Ultimately, all mortgage refinancing requires changes to legal instruments. These changes cost money, so somewhere within the transaction someone is paying some fees. This statement raises another concern. How do lenders advertise FHA streamline refinances with no fees or no costs?

When a borrower is able to refinance without cash out of pocket and without adding fees to their existing loan balance, many consider the transaction free. Although it is rare to find lenders that offer FHA streamline refinancing options that do not require cash and do not add fees to the principal loan balance, there are some FHA streamline programs like this out there. A few lenders actually offer FHA streamlines and structure the loans so the borrowers do not add fees to their loan balances.

A few mortgage companies are eager to earn new FHA streamline refinances and they are sometimes willing to sacrifice part of their commissions or revenue to gain a new client. These lenders waive the fees, like with no closing costs loans, but they also use a portion of their commissions, premiums and other revenue to pay the title and transfer fees that the borrower would typically pay in cash or add to their loan balance. This credit is called a Title Fee Credit (TFC). When lenders give borrowers Title Fee Credits, the borrower essentially receives a lower mortgage payment, keeps their loan balances about the same and the bank pays all or some of the fees the borrower would typically pay themselves. This is why many consider the FHA streamline refinancing free.