The FHA loan guarantees home loans and mortgages to borrowers who qualify under their loan guidelines. The Federal Housing Administration is a part of the Department of Housing and Urban Development (HUD) that insures private housing loans. The FHA also assists lenders by reducing their risk in issuing those very loans to borrowers. FHA loans benefit borrowers who cannot afford the larger down payment on a traditional mortgage, and aid lower-income borrowers in purchasing homes they would not ordinarily have qualified to purchase. When considering applications for loans — including refinancing — the FHA imposes qualifying guidelines for loan approval different from those of other lenders.
FHA Cash Out Refinancing
The FHA offers several different choices to borrowers wishing to refinance their mortgages. One of these options is known as Cash Out Refinancing. With a Cash Out Refinancing, borrowers apply for a new mortgage through the FHA that is greater than the amount they owe on their current mortgage. With this new, larger loan, the borrowers have the funds to pay off their original mortgage loan, and are able to still retain a sum for themselves (which is typically the reason for refinancing a mortgage in the first place). That sum, the difference in the mortgage amounts, results from a home’s equity, and the difference between the original value and current value of the property.
FHA Streamline Refinancing
Another option the FHA offers is known as Streamline Refinancing. This is a quick and easy option, allowing the borrowers to simply reduce the monthly payments on their loan. When applying for a Streamline Refinancing, the new mortgage being applied for must lower the interest rate being paid on the loan. This option is especially beneficial for borrowers with good credit and low debt, as it simply allows them to save money on their loan each month.
Loans Reviewed as Individual Cases
Each application for an FHA loan refinancing is considered based on individual cases. The pattern established by a borrower, rather than individual problems, is considered when reviewing an FHA loan application. If an applicant is in good standing with their credit and debts, and does not have a history of deferment or an established pattern of delinquency, then that applicant is likely to be approved for an FHA refinancing. A single late payment, or perhaps an unconventionally large deposit, may be questionable, but it will not necessarily determine the status of the loan approval.
FHA Loan to Debt Ratios
A borrower’s income and monthly expenses are always going to be factor when being considered for a loan. Typically, the debt-to-income ratio for FHA loan refinancing is 31/43, meaning that your housing costs must be 31% of your gross monthly income, but you must also have enough income to pay your housing costs plus all other monthly debt (43%). What these numbers indicate to the FHA is that you fall into a certain income bracket to which the FHA loans are targeted.
Lastly, any refinancing application will consider the borrowers’ credit. However, FHA credit standards are more flexible than traditional mortgage lenders. FHA loan refinancing requires a FICO score of 620 or better, whereas many lenders require that score to be closer to, or above, 700.