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.
- 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.
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.
You’ll need to consult a loan officer or mortgage broker and do the math to figure out whether an FHA-insured loan or conventional loan would be a better fit for your situation. Compare the interest rate, terms and costs, and be aware that if you have a relatively lower credit score or want to take out cash, some lenders will tack on a “price adjustment” in the form of additional points.
Homeowners have two options to refinance into an FHA-insured loan.
- Those who already have an FHA-insured mortgage can use a so-called “streamlined” process that requires neither a credit check nor an appraisal. These loans can be closed in a matter of days and the cost tends to be reduced in part because no appraisal is required. The streamlined process can be used to lock in a lower interest, but not to take out cash or consolidate other debts into the FHA-backed loan.
- Those who have a non-FHA-insured mortgage or want to consolidate debt or take out cash can still refinance into an FHA-insured loan, but a credit check and appraisal will be required. Loan approval will be based on your income, other debts and credit history. You must be a legal U.S. resident and have a valid Social Security number to apply for an FHA-insured loan.
Vets can refinance up to 100 percent of home’s value
Military veterans who want to refinance can take advantage of recent changes that make the VA’s loan guarantee program more flexible for borrowers. The program now allows an LTV ratio of up to 100 percent, rather than the previous limit of 90 percent. Maximum loan amounts have been increased from just $144,000 to significantly higher limits, depending on the county where the property is located.
“These changes will allow (the) VA to assist a substantial number of veterans with subprime mortgages to refinance into a safer, more affordable VA-guaranteed loan,” VA Secretary James B. Peake said in an October 2008 statement.
During war time, an active-duty member of the U.S. military needs only 90 days of service to qualify for the VA loan program. The requirement for a reservist or National Guard member is six years, unless the member is called up to active duty, in which case the 90-day requirement applies, according to Jim Brown, CEO of Veteran Mortgage in Everett, Wash.
“A lot of reservists don’t know that they qualify,” Brown says.
The VA charges an upfront funding fee, but the fee is waived for veterans who have a 10 percent or more disability and there is no mortgage insurance on these loans. Borrowers must have a stable income and reasonable good credit history, though the guidelines are generous and flexible, Brown explains.
A longtime stigma against VA loans as being onerous and complicated is outdated and unwarranted in Brown’s view. He says the VA has “worked really hard to make (the program) as viable and friendly as possible.” Vets who want to refinance should consider a VA-guaranteed loan, he adds.
“Unless the LTV is less than 80 percent, it’s highly likely that anyone trying to steer (a qualified vet) into a non-VA loan is doing them an injustice because mortgage insurance kicks in above 80 percent on conventional loans,” he says. “Nine times out of 10, (the VA loan) will be the best product.”
Rural Development only refinances own loans
One other federal government agency — the U.S. Department of Agriculture’s Rural Development Department — also guarantees home mortgages. But while the department’s program may be ideal for moderate-income home buyers in small towns, its applicability to those who want to refinance is limited because the agency will only refinance or modify existing RD loans, according to Jay Fletcher, a spokesperson for the USDA department. Borrowers must have adequate income and an acceptable credit score, and an appraisal is required.