You don’t have an FHA loan right now, so why would you consider one when you want to refinance? There is one simple reason – you do not need a lot of equity. In fact, you only need 2.25 percent equity in your home in order to qualify! There are many other benefits, but the fact that you can lower your rate without the minimum 5% equity that conventional loans require is often enough to get people to refinance into an FHA loan.
No Double Approval
With a conventional loan, not only do you need 5% equity at a minimum, you also need to gain approval from not only the lender, but the company issuing the private mortgage insurance as well. If the PMI company does not feel that your loan is a good risk, they will not provide the PMI, which means you cannot get approved for the loan. This double approval can stand in the way of many people obtaining a conventional refinance.
The FHA refinance does not require that double approval – once you gain approval for the FHA loan, you get the mortgage insurance as well as it comes directly from the FHA, not a third party. This makes it possible for more people to qualify for a refinance, saving them money in the long run, especially if they obtained their original loan when interest rates were higher.
FHA loans as a general rule are easier to qualify for than conventional loans. They have lower credit score requirements and are more flexible with the debt to income ratios. The FHA themselves are the most lenient, but some lenders might add their own requirements to tighten up the restrictions and decrease their risk of default. Some lenders, however, stick with the FHA guidelines because the FHA guarantees the loan for them – this means if you were to default on your loan, the lender would receive a portion of the money back from the FHA, decreasing their risk of loss.
Finance the Closing Costs
Yet another reason to refinance into an FHA loan from a conventional loan is the ability to finance your closing costs. Let’s look at an example:
- Appraised value $200,000
- Allowed loan amount $195,500
- Outstanding loan amount $193,000
- Allowed closing costs to be rolled into loan $2,500
This means that you can roll in a portion of the upfront mortgage insurance you will have to pay, which equals 1.75% of the new loan amount or you can roll in the closing costs that equal up to $2,500. Either way, you reduce the amount of money you must bring to the closing, making the refinance even more affordable for you.
Many people discount the value of an FHA refinance because they think the program is strictly for first-time homebuyers or people with bad credit. In reality, the program is for anyone that is ready to lower their interest rate and ensure an approval by all parties involved. FHA loans often offer lower interest rates than any other program and offer the most flexible guidelines to help you get into a loan. If you are paying too much interest, consider exploring an FHA loan for your refinance. The possibilities are there to save plenty of money every month, even with the need to pay the annual mortgage insurance, which is oftentimes lower than the amount you would pay for private mortgage insurance on your conventional loan.
If you have minimal equity in your home and think you are stuck with your conventional mortgage with a high interest rate, think again – the FHA refinance is a great way to get you into a new loan that saves you money every month!