When it comes to your home, you want to be extremely knowledgeable in how an FHA refinance works. Take a hold of your investments and make the best decision for your mortgage by being fully informed on the ins and outs of an FHA refinance. Here are a few things to acquire before you refinance.
I. Three Types of FHA Refinance Options (Cash Out, Streamline, Replacement Loan)
Depending on your current situation, you may apply to one of these options to help refinance your home. A streamline refinance and cash out option requires an existing FHA loan. However, a replacement loan requires an existing conventional loan. All three options are available for your underwater mortgage situation. The cash out option is helpful by taking the existing mortgage by taking out another mortgage for more than they currently owe. The streamline option is good for reducing the interest rate on your current home loan and usually without an appraisal for approval. All the while, a replacement loan is perfect for a clean start.
II. Stay Up to Date On Existing Mortgage
If you are looking to get refinanced under the federal government, make sure your payments on your mortgage are current. Having late or missing payments on your current mortgage makes you ineligible for acquiring any FHA refinance loan. Always make sure you have no missing payments to make the applying process a lot smoother. If you have any late payments, you need to show late fees incurred as well as your default interest on the amount owed. Records of your payments and being honest with your bills show you have nothing to hide.
III. Bad Credit Issues
Unfortunately, if you have a few blemishes on your credit report, you will be ineligible for a cash-out refinance loan or a replacement loan. If you have late payments on other bills beside your home in the past 2 years, it’s hard to qualify. Your income needs to be able to pay off your credit card bills, your home, and other loans/debts you need to pay. A streamline option works a bit differently as credit is not a focal point of deciding whether you qualify for a federal government loan. In the next section, there’s more information available regarding streamline eligibility.
IV. How to Qualify for a Streamline Refinance
It’s a lot easier to be eligible for a streamline refinancing option because it allows a borrower to refinance without having to verify their income and assets. A steady job bears more weight than a credit report because they want to see stability of your current income situation. A few stipulations of applying for a streamline plan includes living in the house you are refinancing, no more than two, 30-day late payments on your federal government loan mortgage in the past 12 months, and you have not completed a Streamline Refinance via the administration in the past 6 months.
V. How to Qualify for a Cash-Out Refinance
Your qualifications for a cash-out refinance depends on an existing federal loan as well as enough equity invested in the home to meet the down payment. A credit score does play a role in acquiring this type of refinancing. A credit score of at least 580 means you will need around 3.5 % equity in your home. Anything less than a 580 credit score, requires a 10% equity. You need to pay for a property appraisal to determine your house’s market value. Also, make sure you have proper funds so that you can verify your monthly loan payments reflect less than 29% of your monthly income. If you purchased your property a year prior to refinancing, you can refinance the existing mortgage for up to 85% of the appraised value plus allowable closing costs (varies per state).
VI. Acquiring a FHA Replacement Loan After Having a Conventional Loan
If you started with a conventional loan, you could very well acquire a replacement loan. The requirements regarding a cash-out refinance in terms of credit, down payment and income are the same in a federal loan replacement. Additionally, the FHA Short Refinance program allows borrowers with conventional loans to save their property by refinancing into a federal mortgage if they were underwater on their mortgages. This is effective until December 31, 2014. A recent change of this program is putting borrowers on a trial payment method. Borrowers who were delinquent on existing loans could receive eligibility based on completing a trial payment plan with three consecutive on-time monthly payments.
If you are looking to refinance via the administration, please note of the 3 main ways of going about this method. There are similarities and differences to each one, but make sure it’s a choice you can afford. Additionally, talk to a lender to get better insight into your long or short-term decision.