Section 6: FHA Loan Refinancing
FHA Loan Refinancing
The FHA Home Loan program provides qualified homeowners with a simple way to take advantage of rates and decrease their monthly mortgage payment. Beyond that, homeowners can get cash back on a FHA refinance and use the proceeds for a variety of needs, from paying off debt or making home improvements and much more. Now the current economic climate makes a great time or many homeowners to take advantage of the numerous benefits found in a FHA refinance.
To get started, call, or start your FHA Refinance quote online.
When Should you Refinance a FHA Loan?
In general, you should refinance a FHA loan if:
Your Home’s Value Has Gone Up
If you have built equity in your home either by the housing prices rising or paying down your loan it might be a good time to refinance. If you need to lower your interest rate, need cash to pay off debts, or do an additional project on your home then a refinance might be the best option for you.
10 steps to Refinance Your FHA Loan
Most borrowers follow the following FHA refinance steps:
1. Determine if you still need a FHA loan.
The criteria for FHA loans changes each year FHFA sets the conforming loan limits. If your existing loan balance exceeds these limits, a FHA refinance loan may be your only option.
2. Check your credit scores.
Many FHA lenders set the minimum bar at 700 for a FHA loan. That’s 80 points higher than the conventional minimum, so make sure you check your credit score before you apply for a FHA refinance.
3. Make sure your debt-to-income (DTI) ratios are in line.
FHA lenders measure your DTI ratio by dividing your total debt by your gross income, and 45% is the standard maximum. That’s significantly lower than the 50% ratio conforming lenders allow.
4. Shop for the best FHA refinance rates.
Some lenders specialize in FHA loans. Banks may even offer lower rates if you carry large deposit balances with them. Compare loan estimates with at least three to five lenders to make sure you’re getting the best deal.
5. Ask the lender when you can lock in your rate.
FHA lenders may require a loan approval before locking in your rate. FHA rates change daily, so make sure you know your lender’s lock policy to avoid any surprises in the terms of your rate later in the process.
6. Provide your paperwork promptly.
Because FHA lenders don’t allow automated approvals, you’ll have to provide more financial paperwork. FHA loans typically take longer to close than standard loans, because a human underwriter is involved in the decision making and is responsible for ensuring the loan meets FHA investor standards.
7. Keep your cash liquid.
It’s not uncommon for a FHA lender to require proof of six to 24 months’ worth of mortgage payment reserves in a liquid account, meaning it can be easily converted to cash.
8. Plan for a pricey appraisal.
If you’ve got a custom home or a lot of square footage, appraisers may charge more to find comparable homes, and for the extra legwork it will take to measure out and list all the amenities in your home.
9. Notify your escrow officer and loan officer of any trusts in advance.
Lenders want to make sure they can collect on a FHA loan if you default, and they may require extra steps to approve any trust your property is held in. Escrow officers may also need a copy of the trust to properly prepare your closing documents.
10. Review your closing disclosure and close.
Like any refinance, you’ll receive a closing disclosure three business days before your closing. Review the paperwork and make sure the numbers are what you expected. If everything looks correct, your loan documents will be returned to the lender, your old FHA loan balance will be paid off with the funds from your new FHA loan.
FHA Refinance Requirements
. At least 20% equity in your home
. A minimum 700 credit score
. Total debt that doesn’t exceed 45% of your income
. No major credit problems in your recent past, such as bankruptcies or foreclosures
. Full documentation of all sources of income including tax returns, paystubs, CPA letters and IRS validation of all filed tax forms
* Requirements may very program to program and lender to lender
How to Get the Best FHA Refinance Rates
FHA lenders typically set interest rates based on their own standards. Shopping for the best FHA refinance rates could save you thousands or even hundreds of thousands of dollars over the life of the loan.
You’ll typically snag the best FHA mortgage refinance rates if you:
Have a high credit score.
Although 700 is the minimum, FHA lenders may reward higher-credit-score borrowers with lower rates and closing costs.
Don’t borrow the maximum.
FHA lenders may offer a lower rate if you’ve built up substantial equity and just want to refinance to save on your monthly payment (and not tap equity).
Avoid niche FHA loan programs.
Some FHA lenders offer special programs to make FHA refinance qualification easier, such as using bank statements instead of tax returns to prove income. These flexibilities usually require you to pay a premium in the form of a higher interest rate.
Two Great FHA Loan Refinancing Options
FHA Streamline (IRRRL) Refinance
The FHA Streamline Refinance is a mortgage refinance product through the Federal Housing Administration (FHA) that can help homeowners with an FHA loan to lower their interest rate and reduce their monthly payment. As the name suggests, an FHA Streamline is a relatively speedy and simplified process. The foundation of the FHA streamline is treated the same as an FHA loan once the process is done.
A FHA Home loan is one that is through the Department of Housing and Urban Development (HUD). Unlike conventional loans that are supported by Fannie Mae and Freddie Mac, FHA home loans are supported by HUD. HUD is a Federal Agency responsible for national policy and programs that address America's Housing needs, that improve and develop the Nation’s communities, and enforce fair housing laws. HUD has a record of accomplishments that spans more than 30 years. Thousands of communities and tens of millions of Americans have benefited from HUD's housing and community development programs.
FHA home loans have been streamlined through the years to provide access to the mortgage market for all types of buyers but especially first-time home buyers and buyers who might be credit and down payment challenged. A FHA home loan is a large sum of money lent to a borrower by a mortgage lender. FHA home loans often have higher lending requirements but the benefits of meeting those requirements are returned with competitive rates, down payment requirements, and competitive offers on your future home. When a prospective homeowner is ready to shop around for a mortgage, they will work with their Orbit Home Loan mortgage broker. This is a financial professional who brings together borrowers and lenders. They are not lenders and, as such, do not use their own funds to advance mortgage loans. Instead, they act as intermediaries, helping consumers comparison shop, bringing them a variety of quotes from different lenders at one time.
Cash-Out Refinance
A "Cash-Out" refinance is an option for those with a FHA loan looking to take advantage of their home's equity to access cash for home improvements, emergencies, pay off debt, or any other purpose.
Thinking about refinancing? Speak with an Orbit Home Loan specialist to discuss your options.
FHA Refinance Eligibility
In general, to be eligible for an FHA loan, borrowers must meet the following guidelines: Have a FICO score of 500 to 569 with 10 percent down, or a FICO score of 580 or higher with 3.5% down. FHA loans, which are insured by the Federal Housing Administration, are great loans for those who are budget sensitive and having credit difficulties.