In recent years, FHA home loans have risen in popularity due to modernized loan limits and more flexible qualifying guidelines. Fortunately, homeowners with existing conventional home loans can still take advantage and refinance into a new FHA home loan. Below is a short guide to help get you started and see if a FHA home loan refinance is right for you.
Refinancing from Conventional Mortgages to FHA Home Loans
What Are Your Goals For Refinancing Your Existing Mortgage?
FHA home loans and conventional loans are typically marketed to different borrowers. And while some might have differing opinions on FHA loans versus conventional loans, most will agree that homeowners need to first identify their goals when refinancing.
Before settling on an FHA home loan or conventional loan, first figure out what you're trying to achieve with your refinance. Mortgage refinances are usually driven by three major goals: cash out available home equity, reduce interest rates, or shorten the mortgage term. Fortunately, each of these opportunities are possible when refinancing into an FHA home loan. In fact, FHA Streamline refinances are the only refinance in which the original loan must be an FHA mortgage. The streamline refinance requires a prior FHA home loan because the process is much more automated, and often requires no appraisal or credit qualification.
Look at the Numbers
For instance, if you're cashing out some of your home's equity, calculate what your new loan-to-value ratio would be for the new mortgage. If you're thinking of a simple rate and term refinance, compare refinance rates between an FHA and conventional loan offering. Typically, FHA allows an 85% cash-out refinance without additional penalties. Conventional lenders add significant surcharges for that benefit.
What Are the Benefits of an FHA Home Loan?
So why do borrowers refinance their existing home loans into FHA home loans? For many, FHA underwriting guidelines are much more flexible when it comes to dealing with credit issues and other qualification factors. One of the benefits of FHA mortgages is that many lenders still utilize manual underwriting, or "common-sense" underwriting.
For example, suppose a borrower had some issues with his or her credit score and is having trouble refinancing with conventional loan lenders. With an FHA loan, lenders still acknowledge the credit history weakness, but FHA guidelines would allow them to compensate such factors with a higher household income or increased assets. FHA lenders also consider non-traditional credit such as on time utility bills, retail store accounts, and other repeated monthly obligations. In the end, this means fewer penalties, or "add-ons", to one's interest rate--in many cases, this could also mean the difference between qualifying or not.
Another great thing about FHA home loans is that the typical offering is a traditional thirty-year-fixed-rate mortgage. There's no need to worry about adjusting interest rates, restrictive prepayment penalty fees, or other "affordability" incentives. Remember though, deciding between an FHA or conventional home loan isn't just a matter of preference or hearsay. By identifying your goals beforehand, the better mortgage will usually make itself clear after comparing the numbers and alternatives. This includes all aspects of the refinance process such as interest rates, loan limits, qualifying guidelines, closing costs, lender fees, and mortgage insurance premiums.
Heindrick So is a mortgage consultant at a local Bay Area Real Estate Brokerage--specializing in residential wholesale lending. Heindrick frequently contributes to various finance columns, ranging from home loans and mortgages, debt management, and other personal finance topics.