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FHA Loans Gain Popularity (Joy B. 491) The Federal Housing Administration (FHA) program first began in 1934 in an effort to encourage home ownership despite the economic difficulties of the era. The program enables consumers who may not qualify for a standard loan to obtain the financing they need to purchase or refinance their home.
Greater Flexibility FHA loans differ from typical loan programs in that they are insured by the Federal Housing Administration which is part of the Department of Housing and Urban Development (HUD). Because this insurance reduces the lender's risk on the loan, lenders have greater flexibility with regard to approving your loan.
For example, FHA loans are not credit-score driven, so you may be able to refinance and gain access to your home equity despite having had credit problems or even a bankruptcy in the past.
An FHA refinance loan can also provide added flexibility when it comes to your closing costs. Many of the closing costs can be incorporated into the loan amount, essentially using your home equity as cash enabling you to refinance with the minimal amount of cost coming out of your pocket.
What if you do not have a lot of home equity available? FHA refinance loans can help you as well. In October 2005, HUD issued Mortgagee Letter 05-43 which extended the FHA guidelines to allow rate and term and cash out refinances up to 95% of the appraised value in certain circumstances.
Another great refinance advantage of FHA is that they do not care about combined-loan-to-value (CLTV) in the case of a full qualifying refinance. As long as the first mortgage loan-to-value (LTV) is within FHA limits and the existing second lender will subordinate behind the new first mortgage, the CLTV does not matter. This allows you the opportunity to refinance your existing loan with an FHA insured lender while gaining access to your home equity for the cash proceeds you may need.
Great Rates and Low Monthly Mortgage Insurance A distinct advantage of an FHA insured loan, as compared to other loans, is great interest rates and lower monthly mortgage insurance (MI). Depending on the lender, standard FHA loan interest rates are usually better than a conforming 30-year fixed loan. Also, the mortgage insurance premium on a FHA loan can be as low as .05% per year. Compared to a conforming loan, this is substantially less expensive than most of the high LTV conventional programs in which the mortgage insurance and premium could be as high as 2.87% per year.
Like any other loan program, an FHA refinance does have some limitations. The FHA has counselors available that can help you with deciding what your refinance options may be with an FHA insured lender. As with any refinance loan, take the time to do your research. By spending the time you may discover you qualify for a program such as the FHA refinance and save you and your family a significant amount of money over the years.
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