FHA Short Refinance Explained

An FHS short refinance option allows you to replace your current FHA loan with a new loan. And, the new loan has better monthly repayment options or other useful terms. In short, you get a new mortgage when you opt for refinancing. However, you need to complete a new registration form along with a new closing cost.

This option benefits both the homeowner and the bank. The homeowner doesn’t lose their home and the banks lose less than they should have if there is a foreclosure. In this article, you get an insight into the FHA short refinance explained in a detailed way for a better understanding.

WHAT IS THE FHA SHORT REFINANCING PROGRAM?

Homeowners who owe more than the value of their property in net worth are allowed to participate in a new assistance program called FHA (Federal Housing Authority) Short Refinancing program. These kinds of mortgages are referred to as upside-down or underwater home loans.

The Federal Housing Authority (FHA) Short Refinancing program caters to the needs of those families or individuals who owe more money to the lenders compared to the value of their property. However, that is a common scenario that most people are facing amidst this weak and downtrodden housing industry. People refer to these types of mortgages as upside-down or underwater because the principal value of the home is less than the value of the loan.

WHAT ARE THE ELIGIBILITY CRITERIA FOR THE FHA SHORT REFINANCE ASSISTANCE PROGRAM?

To qualify for the FHA short refinance assistance program, borrowers or homeowners need to fulfill the following conditions.

The homeowner should fall in the negative equity position
As their primary home, the homeowner should possess the property of about 1 to 4 units
It is mandatory on part of the homeowner to qualify for the new FHA loan that falls on the standard FHA underwriting requirements. Also, they should have a FICO-based credit score. And, it has to be equal to or greater than 500
The FHA insured loan and the existing refinance loan should not be the same
The current first claim has to write off a minimum of 10% of the principal balance that is unpaid
The refinanced FHA loan should not be over 97.95%
The FHA mortgagees are barred from using the pricing to pay off the current debt obligations to qualify the homeowner for the new loan
Also, they can’t make mortgage payments on behalf of the borrowers

ADVANTAGES OF FHA SHORT REFINANCE ASSISTANCE PROGRAM:

Homeowners get equity in their property
The program keeps their home safe
Homeowners get a reduced mortgage balance
They get to pay a low-interest rate
The monthly payment reduces on short refinance

DISADVANTAGES OF FHA SHORT REFINANCE ASSISTANCE PROGRAM:

The process consumes a lot of time
There is no guarantee whether the lender approves or not
Need to qualify for the procedure with full documentation
FHA refinance lowers the credit score

FHA SHORT REFINANCE REQUIREMENTS:

There are certain requirements that homeowners need to fulfill to avail of FHA refinance. However, the requirements vary from one lender to another. In general, lenders will look at the items below and determine whether you qualify for the program or not.

CREDIT SCORE – Lenders use a credit score to determine how you are going to pay back the money. And, every lender follows their own set of credit score guidelines for different kinds of loans. Credit scores influence the rate of interest as well. So, a high credit score helps you to qualify for a loan with a low-interest rate. As such, you are paying less money as interest.

DTI (DEBT-TO-INCOME RATIO) – It is the percentage that you get when you divide your total monthly debt payments by your monthly income. The debt payments include student loans, car loans, credit card balances, and mortgages. Therefore, a person with a monthly income of $5000 and monthly debts of about $1250 has a DTI of 25%. The lower your DTI, the more are your chances of getting approval for an FHA refinance.

LTV (LOAN-TO-VALUE RATIO) – When you divide the mortgage amount by the value of your home, you get the loan-to-value ratio percentage. For example, if your home value is $250,000 and your mortgage amount is $125,000, the loan-to-value ratio is 50%. Keep in mind that it is very easy to get an FHA loan when you have a higher LTV.

PAYMENTS – Lenders want to see if you are on mortgage payments and making them on time. That way, they can refinance a loan to you without hurdles.

DIFFERENT TYPES OF FHA REFINANCE OPTIONS:

So, if you are planning for an FHA refinance mortgage loan, there are two available options for you.

FHA STREAMLINE REFINANCE – When you opt for this kind of refinance, it replaces your current FHA mortgage with a new one. The new FHA mortgage has better terms or a better rate of interest. Also, there is flexibility to change from an adjustable to a fixed-rate mortgage. And, you are not allowed to take cash out of your property.

Streamline refinance apply to existing FHA loans. This kind of refinance option has faster closing and less paperwork compared to the other refinance types. There is no income or appraisal requirement either.

FHA CASH-OUT REFINANCES – When you need cash to pay for expenses or integrate debts, an FHA cash-out refinance should be perfect for you. This option allows you to refinance your existing mortgage by making use of your home equity for more than you owe. And, take the difference amount in cash. When you choose the cash-out refinance option, most of the time your monthly payment increases. Moreover, you need to pay a revised set of closing costs.

To get approval for this kind of refinance option, you need to prove that you have enough income to make the monthly payments and a great credit score. Again, different lenders follow their own set of guidelines when it comes to the amount of your home equity you need for the loan.

CONCLUSION:

Refinancing carries potential advantages and disadvantages. So, you have to decide whether or not to take it depending on your current financial status and a balanced life with room for your future goals.