When applying for an FHA refinance on an existing mortgage, you have an end goal in mind. Part of this goal is to reduce the rate by taking advantage of current FHA mortgage refinance rates. In order to get the best rate possible there are a few things that can and should be taken into account prior to signing on the new loan. These include situations both with the federal programs and with the individual applying for a loan, and how the two combine.
How FHA Mortgage Refinance Rates Work
FHA is a government agency that was begun during the Great Depression to combat the fall of the real estate economy, while making it possible for more Americans to purchase homes. Since then it has become a major player in the real estate market and is the reason many thousands of people have been able to purchase homes. The reason the government is able to open up housing opportunities for people is because the lenders that work with this agency know that the loans they offer will be insured by the federal government. There is less risk involved so these lenders are willing to offer better deals to the potential homeowner. In addition to this, the federal government has a set of underwriting guidelines that is much more forgiving than the underwriting guidelines of standard Freddie Mac and Fannie Mae loans.
When a homeowner approaches an FHA lender for a home refinance, the lender is going to look at his financial history, his work history, his credit score, and his current financial state. Unlike a conventional lender, however, the FHA lender won’t deny the loan based on bad credit or an imperfect financial history. Typically, federally approved lenders are willing to give loans to homeowners who have low credit scores, sometimes down to a score of 500. The number will vary by lender, but they are much more lenient than conventional sources. In addition to this, while conventional lenders often require a large down payment, a federally approved loan can be as low as 3.5%. And the FHA mortgage refinance rates themselves are affected by the federal guidelines and the flexibility of the lenders. Typical loans insured by the federal government experience rates as low as, and sometimes lower, than those available through conventional sources, particularly for people who don’t have the perfect financial situation. Basically, all of these guidelines work together to create an optimal financing situation in terms of down payments and interest rates for homeowners.
Preparing Your Finances Before Financing
With any major financial decision, you want to go in prepared. If you want to get the best refinance rate than you need to do some leg work beforehand to get yourself in the best financial situation that you can. This means that you’ll want to look at that credit score, your work history, and your overall financial history and clean up everything you can prior to contacting lenders.
Oftentimes we will find on the credit score that there are discrepancies that have been misreported or simply not removed. You can have these removed by the credit bureaus, but only if you are aware of them. So study your credit report and remove whatever you can. In addition to this, if your debt-to-income ratio is too high you will not be able to qualify for a loan or you may qualify at a higher rate. So paying off credit cards or existing debt prior to applying for a refinance can work to your benefit.
In terms of your work history, when it comes to an FHA loan it is preferred to have a year or two with stable work with the same employer. Ideally your pay will have remained steady or increased during this time. In addition to this, your financial history doesn’t need to be spotless but it does need to show that you are responsible with your bills. Payments that are made late or not at all will reflect badly, so plan long in advance and make those bills a priority.
The Federal Housing Administration guidelines are very lenient and very forgiving, but they aren’t a perfect solution to a bad financial problem. However, with a little bit of advance preparation you can often acquire very low FHA mortgage refinance rates, despite an imperfect situation. Currently the rates are hovering around 4.5%, which means it is a great time to refinance because you never know when they will jump up again. If you’re considering a refinance, now is the time to contact some lenders and get the process started.