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.

Easier Guidelines

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!

Deferred student loans used to be ignored on many loan applications, including the FHA loan. If your loan payments were not due for more than 12 months, the payment did not get included in the debt ratio used to qualify you for a loan, which meant that many homeowners were qualifying for more home than they could afford in the long run. Today, however, when you apply for an FHA loan, any deferred student loans must be included, even if the payments do not begin for more than one year. This is in an attempt to predict not only the current affordability of a new mortgage, but the future affordability as well.

How Deferred Student Loans Affect your Debt Ratio

When you apply for an FHA loan, you will have to consider the future payments that you will incur as a part of your debt ratio. There are a few ways that the bank will determine your payment in order to calculate your debt ratio.

• Loan documents – The most effective way to ensure that the right payment is used to calculate your debt ratio is to provide the loan documents from your student loan. These documents should show the amount of the future payments when they begin. This allows the lender to create an accurate debt ratio for you.
• The 5% rule – If you do not have loan documents, the FHA requires lenders to calculate 2% of the outstanding loan amount. For example, if you have $20,000 out in student loans, the payment used for calculating your debt ratio would equal $400. Chances are that your payment is nowhere near that $400 calculation, but without evidence, it is what the lender must use.

If your deferred loan is not a student loan, but any other type of installment loan, the lender is required to calculate a payment of 5% of the outstanding loan amount useless there is adequate evidence of a lower payment required by the bank.

Qualifying with Future Expenses Helps

It might seem unfair to include future expenses in your debt ratio, but the FHA created this requirement in order to prevent future default. By ensuring that you can afford the loan not only now, but when new debts start to become due, you can lower your risk of not only default, but of losing your home as well. While it definitely makes qualifying for an FHA loan more difficult, it is for the greater good of everyone involved in the loan.

When the future deferred loan payments get included with your loan approval, you will have a better idea of your cash flow a few years down the road if your income remains the same. This way there are no unpleasant surprises when your student loans become due.

The FHA created this new requirement, which began in September of 2015 in order to get a handle on the average amount of student debt, which totals close to $30,000! Without the need to include the future debt, many homeowners were finding themselves in hot water when the loan payments became due, forcing them to default either on the student loans or the mortgage payments; either way, consumers were defaulting on government debt, which hurts everyone I the long run.

The FHA loan is usually easy to qualify for and even with deferred student loans, it can still be considered easy to obtain, as long as you know what you are getting yourself into. If you are unsure of your future student loan payment, contact the issuing bank to get evidence of the payment so that an accurate debt ratio can be calculated for you.