mortgage

Government helps homeowners refinance

Highlights
  • Not all lenders and mortgage brokers are able to offer FHA or VA loans.
  • FHA-insured loans require mortgage insurance for at least five years.
  • Some lenders will tack on a "price adjustment" in the form of additional points.

If you're looking for a way to refinance your mortgage, you might want to consider a loan that's backed by the Federal Housing Administration or, if you're a U.S. military veteran, the U.S. Department of Veterans Affairs. Loans backed by these two federal government agencies are especially attractive today because the loan amount limits have been raised, and some loan programs are open to homeowners who have little to no equity or imperfect credit.

Given those benefits, it's no surprise that government-backed loans have accounted for a much larger share of total loan applications. In the second half of last year, government-backed loans accounted for as much as 30 percent of the total loan applications submitted to lenders, according to the Mortgage Bankers Association in Washington, D.C., which has tracked that figure since January 1990. Compare that one-third share to the lowest share of government-backed loans on record -- 5.8 percent in August 2005 -- and it's clear that homebuyers and homeowners have taken a renewed interest in these loans.

Yet not all lenders and mortgage brokers are able to offer FHA or VA loans, according to Greg Gwizdz, national sales manager at Wells Fargo Home Mortgage in Des Moines, Iowa. That means if you believe this type of loan might be appropriate for you, you should be sure to ask upfront whether your lender or broker offers these types of loans.

"If the lender you choose doesn't offer FHA, you might not be getting the right loan," Gwizdz warns.

FHA allows high LTV ratio, lower credit score

Homeowners have flocked to FHA-insured loans for a few reasons in particular.

Benefits of FHA loans
  • The interest rates are competitive compared with conventional loans.
  • The qualification guidelines are easier.
  • The credit standards may be more flexible.
  • The closing costs may be lower.
  • The loan-to-value, LTV, ratio may be as high as 97 percent.

The catch is that all FHA-insured loans require mortgage insurance for at least five years. Mortgage insurance protects the lender if the borrower defaults on the loan but is paid for by the homeowner in the form of an upfront fee and monthly premiums that are added to the mortgage payment. The FHA usually allows the upfront fee to be financed as part of the loan amount, but either way, mortgage insurance still adds to the cost of an FHA-insured loan.

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Whether a borrower would be better off with an FHA-insured loan or a conventional mortgage depends in part on the LTV ratio, according to Don Frommeyer, senior vice president at AmTrust Mortgage in Carmel, Ind.

A borrower whose LTV ratio was less than 80 percent typically wouldn't need mortgage insurance on a conventional loan. That tends to make an FHA-insured loan less attractive for those borrowers who have at least 80 percent equity. Borrowers who are short on equity, perhaps because the value of their home has declined, may find the FHA-insured loan more attractive despite the added cost of mortgage insurance. An FHA-insured loan also may be appropriate for homeowners who want to refinance a first mortgage and home equity loan or line of credit. Those borrowers may be able to combine their two loans into one new FHA-insured loan with an LTV ratio up to 97, Frommeyer explains.

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