In the real estate market nearly all home loans are given through conventional lenders or those that have been approved by FHA. Conventional lenders follow the underwriting guidelines of Freddie Mac and Fannie Mae and they are not tied to the government programs. These underwriters are, however, subsidized by the government. FHA lenders follow the underwriting guidelines of the federal government and are much more lenient in their initial requirements for a homeowner to secure a loan or to refinance an existing loan. Between the two of them, they keep the real estate market functioning as it does today. As a homeowner, you’re probably thinking about refinancing, you may be wondering if you should have FHA refinance your mortgage. While this can be a great idea, there are some pros and cons that you should be aware of.
Conventional vs. FHA Requirements
When you apply for a refinance through a conventional lender, you will have to meet the requirements that they have established for approval. Typically, lenders like you to have a really good credit score, in the 700 range at least but preferably higher. You also need to have a fairly low debt-to-income ratio, a stable job, and a good credit report. In addition to this, any asset you have will be marks in your favor. Each conventional lender has their own requirements that have to be met, but they are all fairly similar and they take the items mentioned above into account. If you are in a great place financially than a conventional lender will be more than willing to work with you; you’re the ideal customer. However, many homeowners find that they are unable to qualify for a refinance with a conventional lender because their financial situation is subpar. Other homeowners can qualify but at interest rates that are too high to be beneficial.
When comparing conventional vs. FHA requirements, you’ll find that they differ greatly. The job of a government approved lender is to make it possible for you to get the refinance you need for the result you want. If you come to a federally approved lender and you have low credit and a spotty credit report, you may still be able to qualify. Most of the time on an FHA loan the biggest requirement will be that you’ve had a stable job history and payment history. If you’ve had a previous bankruptcy or foreclosure, you’ll have to make sure a couple of years has passed before you can get approved. Your lender will be able to share with you exactly the qualifications he needs to get you approved.
Now keep in mind that federally approved lenders don’t have to approve every loan and in many cases they won’t, but more often than not they approve loans that conventional lenders aren’t willing to work with. However, if you have a great financial history, a conventional refinance is often the more affordable route.
Things to Consider When You Have FHA Refinance Your Mortgage
Aside from the less stringent qualifications for an FHA refinance, people often gravitate to this option because of the flexibility and resale perks that the loan offers. FHA has an assumable loan, which means if you want to leave the home you can have your buyer assume the loan; he gets the terms that you originally agreed on and you sell the house and move on. When a buyer is looking to purchase a home, an assumable loan is an enticing option. In addition to this, because the requirements for approval on a federally insured loan are less stringent, you have a greater share of the market that will be able to buy your home. You can appeal to buyers that will use conventional lenders as well as those that will use FHA. This wide market range increases the stability of your home.
Of course, when you have FHA refinance your mortgage you will find limitations as well. First, you have to pay mortgage insurance and you will have to pay this for the life of the loan. Oftentimes this insurance can be removed after you hit a certain level of equity with a conventional loan, but that is not the case for a federally insured loan. In addition to this, because the people who choose FHA have imperfect financial situations, the interest rate may be a bit higher than you would have gotten if you had great credit and went through a conventional lender.
When it comes down to actually determining whether you should have FHA refinance your mortgage or not, you’ll want to discuss your options with both types of lenders. Get quotes from conventional sources as well as FHA sources. If you do, you’ll be able to make a decent decision regarding your refinance. You’ll also be able to get a clear picture of what is required of you for the refinance to be approved.