FHA refinances: A helping hand to low-equity homeowners
October 19, 2011
Homeowners sometimes neglect the possibilities offered by government-insured FHA loans, often because they assume they're only for first-time buyers. While these loans are popular with first-time buyers because of their low down payment requirement, that same requirement means that homeowners can refinance with as little as 2.25 percent equity in their property.
According to HSH.com, the average interest rate on a 30-year fixed-rate FHA mortgage dropped to 3.94 percent during the week ending October 7. If your current mortgage is higher than 4 percent, you may want to consult with a lender to find out if an FHA refinance could work for you.
FHA refinance benefits
Not only does an FHA refinance allow you to possibly secure a low mortgage rate in spite of your minimal equity, it also offers the benefit of looser credit guidelines. In order to qualify, you'll need:
- A credit score of at least 640.
- A debt-to-income ratio with a maximum of 31 percent of your monthly gross income going to your housing payment.
- A maximum of 43 percent of your monthly gross income needed to meet all your monthly obligations, including your house payment.
If you already have an FHA loan, you may even qualify for a streamline FHA refinance, which allows you to refinance without an appraisal. You must be current on your mortgage payments and the mortgage refinance must result in a monthly principal and interest payment that is lower than your current payments. You can use a mortgage calculator to estimate your savings.
FHA loan limits
Your eligibility for an FHA loan depends not only on your creditworthiness, but also on the amount of money you need to borrow. On October 1, 2011, new FHA loan limits went into effect, capping the loans at $417,000 in most areas. FHA loan limits vary by county across the U.S., so in areas with low-cost housing, the maximum FHA loan can be as low as $271,050. In many areas with expensive housing, the loan limit is $625,500 and in some places, such as parts of Hawaii, FHA loans are available up to $713,000. Your local lender should know the limits for your area.
The new loan limits do not impact homeowners who are eligible for an FHA streamline refinance, since those homeowners will be allowed to refinance their mortgage into another FHA loan even if it exceeds the new limit.
Mortgage insurance
One other way FHA loans differ from conventional financing is that all FHA loans require mortgage insurance. Conventional loans require mortgage insurance on loans for borrowers with less than 20 percent equity or who are making a down payment of less than 20 percent. A lender can calculate how much the mortgage insurance on an FHA loan will add to your monthly payment. Even with the mortgage insurance, refinancing into an FHA loan could save you money, depending on the difference in the interest rate you will pay.
If low equity in your home has kept you from refinancing, an FHA refinance could be what you need to finally benefit from the current low-rate trend.
