Every year, the Federal Housing Authority (FHA) insures the mortgages of qualifying borrowers. The FHA provides lenders with an additional insurance that, should the borrower default on the loan, the FHA will pick up the tab on the outstanding balance.
Benefits of an FHA Loan
FHA loans come with a host of benefits for borrowers. For starters, FHA backing can help borrowers secure a loan with a lower down payment.
In traditional private mortgages, lenders prefer a 20% down payment. With a down payment any lower than that, lenders often charge higher interest rates. FHA loans on the other hand, often require as little as three% down. This makes first time home ownership much more attainable.
FHA loans also come with reduced closing costs because FHA-approved lenders tend to charge lower closing costs than their traditional counterparts. This means first-time home buyers, especially, will need to save even less money before buying a home.
These loans are also easier to qualify for, especially for borrowers with less than stellar credit. And because lenders assume less risk, FHA loans tend to come with lower interest rates, lowering the overall cost of home ownership in the process.
Last but not least, the FHA offers special programs to assist borrowers in rough financial situations. In other words, the FHA could help you avoid foreclosure.
The FHA Streamline Refinance
If you currently hold an FHA-backed loan, you may qualify for a streamline refinance option. If your payments are current, the process of a streamline refinance is virtually hassle-free. You won’t need to show tax returns or even show up face-to-face at the bank. An FHA-insured refinancing loan may help you secure lower rates and lower payments, but will also extend the term of your loan.
If you already have FHA-insured loan, the requirements for FHA Streamline are:
- Being current on your existing loan. All mortgage payments for the past year must have been made on time.
- Streamline refinance borrowers must own the property for at least six months before refinancing.
- To refinance with FHA backing, you’ll need an FHA-approved lender. If you would rather not use your current lender, you’ll need to find another FHA approved lender.
- You are not required to have your home appraised. However, a no-appraisal loan cannot exceed your current loan. So, if you would like to secure a cash-out refinance option in which you borrow against your current equity, you’ll need an appraisal.
- You’ll need to decide how to pay closing costs. These can be paid up front, or covered by the lender through a “no-cost” FHA Streamline loan. In the latter case, your lender covers the cost up-front, but is likely to increase your interest rate. Another option is to include closing costs in your loan, if you’re using a “with appraisal” FHA Streamline loan. To do so, you’ll need enough equity in the home to cover the additional closing costs.
If you have a conventional loan you would like to refinance through the FHA, your application process will involve the typical credit check, employment verification, debt-to-income ratio calculations, etc.
You’ll want to begin the process by contacting FHA approved lenders. Refinancing through the FHA can potentially get you many of the same great results: smaller down payment, smaller rates and no mortgage insurance premiums. If FHA backing reduces your rate, you might find yourself paying substantially less each month.
Should you find yourself at all daunted by the process, consult your lender, or contact the FHA. If you plan to refinance, it’s always good to shop around.
Remember, there’s no better way to make sure a lender gives you the best rate possible than to force them to compete with other lenders. Mortgage rates are at an all-time low, so you’ll never find a better time than now to refinance!