With the economy in recovery, many homeowners are dealing with loans and finances that aren’t what they should be and definitely aren’t what they could be. For a lot of these situations, refinancing would solve some of the problems they are dealing with. But, too many people are unable to refinance through conventional sources because of the impact the economic crash had on them. When you FHA refinance, typically it’s because an FHA is more lucrative than a conventional refinance would have been. As a homeowner you need to ask yourself a couple of questions. First, will a refinance benefit you? And second, is FHA the route to take when securing your refinance?
Conventional vs. FHA
Before you decide on the lender for your refinance, you’ll want to know what it is about conventional that would be appealing, and where it doesn’t quite match up when you compare conventional to FHA. Conventional loans follow the underwriting guidelines of Freddie Mac and Fannie Mae, which are the biggest underwriters in the nation. These lenders are willing to work with many homeowners, but only to a point. In order to get the best interest rate and the best terms available through a conventional lender, you need to be well established financially. This means that your credit score needs to be good, at least 720, and you need to have a great payment record. It’s also important that you have a steady, well-paying job, financial assets, and a fairly low debt-to-income ratio. All of these factors come into play on every refinance, but more so on a conventional refinance because a conventional lender carries a little more risk than an FHA lender.
If you meet all of these qualifications, you’ll be in a great place to refinance conventionally. The refinance will cost you a bit more in the down payment and closing costs, but it may also save you money. However, if you do not meet these high standards, the loan will cost you more and you may find that an FHA lender is going to be more lucrative. Keep in mind that you have to pay mortgage insurance on every loan, but with a conventional loan you can get rid of the insurance after you have 20% equity. This is a point in favor of the conventional loan, although it won’t matter if you are unable to qualify.
When you FHA Refinance your Mortgage
FHA is a government program that was designed to open up homeownership to a greater range of people. FHA lenders follow the underwriting guidelines established by the government. The biggest selling features for FHA refinancing a mortgage is the low down payment and the ability to secure a loan despite poor credit. Typically speaking, FHA down payments usually hover around 3.5%. This is a highly attractive feature when you figure 3.5% of $100,00 is only $3,500. Most conventional loans require significantly higher amounts, although there are rare exceptions to this rule. For a refinance, this may be something worth looking at, but in reality the credit requirements are really what you need to look into.
As mentioned above, conventional lenders like their homeowners to have a good credit score and financial history. While they may approve a loan with a credit score in the 600’s, there is a good chance you’ll have an increased interest rate. FHA loans can be secured with low credit scores, sometimes as low as 500 (this will vary per lender), and in many cases the interest rate will be able to compete with the rates offered by conventional sources.
With FHA there is a chance that there won’t be as many loan term options as you would have through a conventional lender, but if you are still able to save money, this won’t be an issue. The biggest hurdle you’ll have to face with FHA is the mortgage insurance. In the past you would be able to get the mortgage insurance removed after you hit a certain equity level, but today that has changed and in most cases you’ll be paying mortgage insurance for the life of the loan. This will be an added expenses that you’ll have to factor in.
What your refinance is going to boil down to is whether or not you save money. Your lender will simply be the source you use to make that happen. If you are able to save more money through a conventional lender than you would through FHA sources, then the better move would be to find a conventional source. However, when conventional falls through FHA, it’s a great way to get the refinance you need to save the money you want.