Learn When an FHA Refinance is Your Best Choice
Editor’s note: Significant changes were made to FHA Mortgage Insurance Premium Changes. Some changes went into effect starting April 9, 2012 and others on June 11, 2012. The changes bring both good news and bad news to borrowers, depending on the type of FHA loan involved:
- Streamline Refinance Loan: The good news is that the mortgage insurance for FHA Streamline Refinance loans is decreasing starting June 11, 2012. The Up-front Mortgage Insurance Premium (UFMIP ) rate decreases to 0.01%, instead of 1%. That means costs are slashed from $1,000 to $10 for every $100,000 borrowed. The annual MIP will be set at 55 basis points instead of 115 basis points, regardless of the loan amount. That means a savings of $60 per month for every $100,000. To be eligible for the fee reduction, your current FHA loan must have been delivered to the FHA before June 1, 2009.
- Single Family Mortgage Loan: The bad news affects home purchase loans and anyone doing an FHA refinance on a loan that is currently a non-FHA loan. Starting April 9 2012, costs increased. The UFMIP increased to 1.75% instead of 1%, which means an up-front increase of $750 for every $100,000 borrowed The annual MIP increased by 10 bps, which means an additional $8.33 per month for every $100,000 borrowed. The increase in the rates was a result of the Temporary Payroll Tax Cut Continuation Act of 2011 signed by President Obama on Dec. 23, 2011.
FHA Refinance or Conventional Refinance?
When you are shopping for a refinance loan, it makes sense to look at all the available options, so you find the best loan for your individual situation. Makes sure to compare an FHA refinance to a conventional refinance. Depending on your situation and the market conditions, one may be better for you than the other.
One of the key advantages of the FHA refinance is that it has easier qualifying requirements than conventional loans, such as:
- Credit Requirements
- Credit Score- Most conventional loans require a higher minimum credit score to get the best rates available. It is common for lenders to require scores of over 720 to get the best rates on a conventional loan. FHA regulations allow borrowers with scores as low as 500 to qualify, though lenders can apply stricter rules. Bills.com is not aware of any FHA lender approving refinances with credit scores below 500.
- Credit Profile- FHA rules are more lenient when it comes to refinancing after a foreclosure or bankruptcy. You may qualify for the best FHA rates available two years after a Chapter 7 bankruptcy and three years after a foreclosure, when conventional financing could be unavailable. It is even possible to qualify for an FHA refinance when you are in the middle of a Chapter 13 bankruptcy.
- Loan-to-Value- FHA loans have far more lenient LTV requirements, allowing borrowers to refinance up to 97.75% on a rate-and-term refinance. Most conventional refinances cap somewhere between 80-90% LTV. FHA cash-out refinances are permitted up to 85%, charging a higher interest rate to borrowers with less than excellent credit.
- Mortgage Insurance- FHA refinances require an up-front mortgage insurance premium (UFMIP) and, for loan terms greater than 15 years, annual mortgage insurance premium (MIP). Conventional loans never require up-front mortgage insurance and for loans with an 80% LTV or less have no mortgage insurance requirements at all. As noted in the editor's note above, costs have increased for FHA UFMIP and MIP. The increase could make the FHA refinance not cost-effective.
- Loan Limits- FHA loan limits currently range from $271,050 up to $729,500, depending on the county in which your home is located. You can look up the loan limits in your area by using the FHA loan limit tool at the Hud.gov Website. If your loan doesn't fit within the FHA loan limit cap, then you can't get an FHA refinance loan.
- Assumability- An assumable loan is one that a qualified borrower can take over from the current borrower. FHA loans are assumable and most conventional loans are not. Given that rates are extremely low, if you have an assumable loan you should be able to sell your house more easily. If rates rise, you'll be able to offer buyers the opportunity to get a loan at a rate lower than they could get through any other loan
Both FHA and conventional loans offer you a choice of fixed-rate or adjustable-rate mortgages. When it comes to fixed-rate, there are fewer options for FHA loans, as they are available in only 30-year or 15-year terms.
FHA Streamline Refinancing
If your current loan is an FHA loan, look into an FHA Streamline Refinance. FHA streamlines are simpler and move faster than a standard FHA refinance. Streamline refis have reduced requirements. They may not require any credit, employment, or income verification. You have to be current on your mortgage, in order to qualify for an FHA streamline. They are available for homes worth less than is owed on them. Read more about FHA Streamline Refinances , if you have an FHA loan now.
Run the Numbers
Before you choose to refinance, whether in an FHA refinance or a conventional one, make sure you weigh the pros and cons costs. Your new payment and the interest rate are important, of course, but they should not be your sole focus. Factor into your decision all the costs you have to pay for mortgage insurance and closing costs. Consider how long you expect to keep the loan and whether your new extends the time to payoff your loan.