Should I Consider an FHA Refinance Loan?

There are many reasons to consider your FHA refinance options. The most obvious is if you are at risk of going into default or foreclosure on your current home loan. If you in an “underwater” mortgage, or if you have an adjustable rate mortgage and are paying much more than anticipated per month, you should consider going into a fixed-rate FHA mortgage. An FHA home loan isn’t for everyone; to get an FHA refinance loan approved you need to meet certain income requirements, debt-to-income ratio regulations and other rules.

You should consider applying for an FHA refinance loan if:

• You face foreclosure or default on your current mortgage


• You have an adjustable rate mortgage that is raising your mortgage payments higher than you can afford to pay


• Your income is considered average or below average for the area where you live


• Your mortgage payments make up 31% or more of your total income


• You occupy the building you want to refinance

DOES MY CREDIT RATING AFFECT MY CHANCES?

FHA refinance loans, like any other line of credit, require a credit check before FHA refinancing is approved. However, don’t be discouraged if you have bad credit because of recent hard times. The FHA credit check compares your overall credit activity to any negative information in your credit report. To qualify for an FHA loan for refinancing purposes, your general pattern of credit activity will be considered, not just current or past problems. You may be surprised to learn FHA rules are much more flexible when it comes to reviewing your credit history for an FHA refinancing loan.

CAN I APPLY FOR FHA REFIANCE LOANS AFTER FILING FOR BANKRUPTCY?

If you’ve been discharged from Chapter 7 bankruptcy for two years or more, you are eligible to apply for FHA refinancing. If you filed Chapter 13 bankruptcy and have made all payments on time for at least one year, you are eligible to apply for an FHA refinancing loan.

HOW CAN I GET READY FOR AN FHA REFINANCING LOAN?

Even if you have good credit, it never hurts to prepare for your FHA refinancing credit check in the same way you’d prepare for any home loan. Make sure you’ve got a history of paying your bills on time, reduce your debt-to-income ratio as much as possible, and reduce the amount of potential debt you have in your name. Check your credit report to make sure you have current, accurate information and be sure to challenge any items on your credit report that are out of date or suspicious.

WHAT IF I ALREADY HAVE AN FHA HOME LOAN?

If you are already making payments on an FHA home loan and want to lower your interest rates, FHA Streamline Refinancing is an option to consider. FHA Streamline loans don’t require any income verification and no credit report is needed unless your particular lender requires it. You can add another person to the property title with no credit check, but if you want to remove someone from your title, you’re required to get a full credit check before you can be approved for an FHA Streamline refinancing loan. You may be able to get an FHA Streamline loan without a new appraisal. If you suspect your home is worth less than it was at the time of your last appraisal, it is best to see FHA refinancing without a new appraisal if possible.

If you aren’t sure whether you qualify for an FHA refinance loan, contact your lender for additional details. Income requirements vary depending on your state of residence and your zip code; you may also find additional flexibility depending on your credit report and the nature of the building you want to refinance.

WHAT SHOULD I KNOW ABOUT TERMS FOR FHA REFINANCING?

If you want to refinance your home mortgage using an FHA refinancing loan, there are several things to know before you begin. FHA refinancing is not the same as the FHA HOPE for Homeowners program, which is designed to protect people from going into default or foreclosure. FHA refinancing loans can be taken out to lower your monthly payments, avoid going into default or foreclosure, and even help you pay for home improvements.

There are different types of FHA refinance loans, each with specific terms and requirements. These include:

• Cash-out FHA refinancing up to 85% of the home’s appraised value


• Cash-out FHA refinancing for up to 95% of the appraised value


• No cash-out FHA refinancing


• Streamline FHA refinancing

In the case of both cash-out FHA refinance loan options, you’re required to own the home for at least a year before applying.

HOW MUCH WILL I GET WHEN I DO AN FHA REFINANCING LOAN?

Figuring out your lending limits for cash-out FHA refinancing loans is simple once you determine what 85% or 95% of your home’s appraised value is. For no cash-out refinancing loans, the calculations become a bit more complex.
For “non-streamlined” FHA refinancing, the loan amount may be determined by one or two calculations:

• A calculation made with the home’s maximum loan-to-value percentage multiplied by the home’s appraised value.


• A second calculation involves the total of the original lien, any second mortgages or “junior liens” over one year old, plus closing costs and other expenses. This calculation is fairly complex and you may need help from your loan officer to understand all the factors that go into it.

The maximum amount of your loan for non-streamlined FHA refinancing will be determined by the lesser of these two calculations.

FHA Streamline refinancing loans are only for those who have existing FHA loans. For Streamline FHA refinancing loans, there is no cash given to the buyer, but the calculations of the loan amounts are similar to non-streamlined FHA refinancing. There are two Streamline refinancing loans. One requires a new appraisal of the home so that closing costs can be built into the cost of the loan rather than having the buyer pay those costs out of pocket. If the home has enough equity to cover the additional expense, the buyer can include the closing costs into the loan amount.

The no-appraisal FHA Streamline loan is limited to the amount of the original FHA home loan only. The buyer must make other arrangements to cover the closing costs rather than building them into the terms of the new FHA refinancing loan.

OTHER TERMS AND CONDITIONS

For non-Streamline FHA refinancing, you may be required to pre-qualify in the same way you did for your original FHA home loan. Streamline FHA refinancing does not require a new credit check in most cases unless your bank has a policy requiring one.

In many cases you are required to be current on your mortgage payments. For 95% cash-out refinancing you are also required to have a record of on-time payments for the previous year.

One area that confuses some homeowners seeking FHA refinancing--the down payment issue. There is a minimum down payment requirement of 3.5% for all FHA mortgages issued after 1 January 2009. However, recent guidelines issued from the FHA states this requirement does not apply to FHA refinance mortgages --there is no down payment required to refinance, but you will have to pay closing costs.