FHA REFINANCE: STREAMLINED REFINANCING BASICS
This refinancing option is considered streamlined because it allows you to reduce the interest rate on your current home loan quickly and oftentimes without an appraisal. FHA Streamlined Refinance also cuts down on the amount of paperwork that must be completed by your lender saving you valuable time and money.
In order to qualify for a Streamlined Refinance your original home loan must be an FHA loan in good standing and the refinance must lower your monthly interest payments. This type of refinancing option reduces your monthly expenses by lowering your payments but there is no option to receive cash back. This works well for people who are in good financial standing with no significant debt because it allows you a little extra money each month that can be put to good use elsewhere.
Generally, the FHA will want your mortgage payment (generally
meaning principal, interest, property taxes and property insurance —
PITI) to be no more than 31% of your gross monthly income. Further,
your total monthly debt obligation including the mortgage; credit
cards; auto loans; student loans; etc. should come to no more than 43%
of your monthly income.
Even higher ratios are available if you are purchasing an energy-efficient home. The so-called “stretch” ratio is 33/45 — 33 percent for PITI and 45 percent for all ongoing monthly payments.
The FHA requires an appraisal of the property. The FHA has a list of closing costs which it considers reasonable and customary. Those include:
- Lender’s origination fee (one percent maximum)
- Attorney’s fees
- Appraisal fee
- Inspection fee (up to $200)
- Title insurance and title examination fee
- Property survey
- Credit reports (actual cost)
- Transfer taxes and recording fees
There is a cap on the amount you can borrow through an FHA loan. It is based on the median cost of a home in your area and it is adjusted annually. You can find the maximum loan amount available through the FHA for your area at https://entp.hud.gov/idapp/html/hicostlook.cfm. You can also find a list of lenders who can assist you with your loan calculations.
The FHA has certain credit history guidelines that generally play a role in qualifying for a loan. Credit scores above 600 will probably qualify through the automated application process. Scores below 600 will be rejected in the automated process and will be processed manually, including an interview with the applicant.
For Cash-out refinance loans, FHA will allow up to 85-95% of the value of the home. For rate and term refinance, FHA will all up to 97.75% of the value of the homeWhen purchasing a home, an FHA loan is often the right choice. This is especially true if any of the following are true:
- You are putting less than 20% down
- You are buying a 3-4 unit property
- You have less than stellar credit
- You need a cosigner
- You want a low, stable rate
FHA loans
require only a 3% down payment, and allow the seller to pay up to 6% of
the purchase price towards the closing costs, you can often buy a home
with very little of your own money.
Some FHA Home Buyers Program guidelines:
- No minimum credit score – FHA has no minimum credit score requirement. The FHA underwriter will evaluate the entire credit profile to determine the borrower’s likelihood of repayment. Past credit issues may be overlooked if new credit has been re-established. Bankruptcy okay – Chapter 7 bankruptcies are allowed if discharged over 2 years ago. Chapter 13 bankruptcies are allowed with a minimum of 2 year of on time plan repayment and trustee approval.
- Little or No Money Needed - FHA loans allow the seller to pay up to 6% of the sales price toward the closing costs. In addition, you may also be able to take advantage of down payment assistance programs.
- Housing History– Not required if it is not available.
- Property types - 1-4 unit, condos, town homes, modular homes, and manufactured homes
- No cash reserves required – FHA does not require you to have cash reserves on 1-2 unit properties. However, reserves can strengthen the overall credit profile.
