You should take the proper precautions if you decide to do a short refinance under FHA loans because it’s quite risky. A lender can help you in your situation but you have to realize that the lender is going to lose money from this endeavor. Also, your credit score will go down as a result. This is an option you should consider if all else fails. Here are some things to ponder before you go through with this refinance.
Requirements of Short Refinance Under FHA Loans
With any form of refinancing, there’s a set of requirements a homeowner must fulfill before proceeding. Make sure that the property you’re refinancing is your primary home. Federal lenders typically accept those homeowners who’ve lived in the home for a certain amount of time. Find out your state’s regulation regarding the minimum amount of years you have to stay in the home. Also, your situation has to be really under the rug for you to go through this refinance. You need proof that this is a negative mortgage, so have a record of what’s going on with your mortgage. The best indication is finding how your mortgage stacks up against the actual value of your home.
Lenders still request that you have solid payments on your mortgage regardless of the situation. It’s very risky for lenders because they won’t profit from this situation. However, they realize that a foreclosure would be much worse. Also, you must not have already done a short refinance under FHA loans. To proceed, your current lender must sign off at least 10% of your existing mortgage. A maximum loan to value ratio of 97.75% is required for your new loan amount. Back in 2010, HUD stated that a credit score of 500 is needed to acquire this plan. If a homeowner cannot get on this level, the situation must be explained through writing a proper documentation.
Why Is it Hard for Lenders to Accept This Refinance?
Whether you’re on a conventional refinance or a federal refinance plan, it takes time to gain a lender’s trust. Even in an FHA short refinancing situation, you need to convince the lender that you’re worth their time. It’s hard to go on faith when the lender helps you boost your equity and lowers your mortgage rates. This takes a bit of time going back and forth. It’s not a sure bet, so you may actually end up with a home and have to look elsewhere.
Issues Going Through This Method of FHA Financing
Decide whether a short refinance under FHA loans is ultimately worth the trouble. Of course, on the surface it does help you keep your home intact, get you lower rates, and gain equity in your home. However, it is not a sure bet. There’s no stability in getting this situation to stick. A lender can easily put you in limbo for quite some time going back and forth in deciding if they should even use their resources to put you in a better position. Additionally, the process severely hurts your credit score. You may miss out on other opportunities such as financing a car and making certain purchases that require a substantial amount of credit. This can severely affect your livelihood in making purchases, getting a new vehicle, or using credit towards another service. In the realm of taxes, you have to take a different course of action because this refinance may show up in your records as a tax implication.
Why HARP May be a Better Avenue
HARP could be another great option because you can use LTV at a level of 150%. Find out how you can gain eligibility into the program by going online to Freddie Mac or Sallie Mae loan website. You need to be under either of these services to get approved. Try to find a lender who’s in expert in this type of situation for your particular state. Get a number of opinions to see whether this is a realistic solution for your issue.
A short refinance under FHA Loans is a great option if you’ve run out of choices and it’s a last ditch effort. In a situation where your credit score could take a hit, you really want to be careful. Try to build the best relationship you can with your lender and show some promise. You don’t want to wait months and months only for bills to pile up and you end up on the short end of the stick.