What Is A Net Tangible Benefit?

From time to time, we get inquiries about a question consumers rarely ask, but in our opinion, the should ask it a lot more.

“What is a net tangible benefit?”

In simple terms, there is an equation that a lender will use when you refinance to make sure that there is a “benefit to the borrower”. Many lenders have started calling these equations the “net tangible benefit” equation.

For example, the California FHA streamline refinance program is very popular right now – because interest rates are lower than they have been in recent years and more people are in FHA loans than in the past because of the elimination of other loan programs.

The FHA streamline program uses a “Net Tangible Benefit” equation – and it can vary from lender to lender, but the general idea is that people need to be able to financially benefit from the transaction so that mortgage lenders aren’t “harming” their financial situation.

In order to participate in the FHA streamline refinance program, there are 3 criteria that must be met:

1. The property must be owner-occupied (no investment properties allowed)
2. The borrower can’t have more than 2 thirty-day late payments on their mortgage in the last 12 months
3. The loan scenario must benefit the borrower – also called a “net tangible benefit” in the mortgage world

Net Tangible Benefit?

The net tangible benefit test simply means that the benefit of doing the transaction outweighs any costs that are associated with the loan. As you know, any time that you go through with a transaction on something as large as your home, there are costs associated with the transaction and FHA wants to be sure that you don’t put yourself in a spot where those costs are outweighing the benefits.

There are various closing cost alternatives with the FHA streamline refinance program – such as no out of pocket closing costs or even no closing costs (where you accept a higher rate and allow the lender to pay your closing costs) but no matter what the scenario is, it must pass the net tangible benefit test.

The reason that we get so few questions about the Net Tangible Benefit Equation is that few consumers actually know it exists and it is different from lender to lender. But when the regulators show up and audit the mortgage lenders, you can be reasonably sure that one of the questions they will ask is “can you provide us a copy of your Net Tangible Benefit Policy”?

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