Many potential borrowers share the misconception that FHA (Federal Housing Administration) loans are available only to first-time homebuyers or to low-income households, but the truth is that government-insured FHA loans are available to anyone who qualifies and purchases a home within the generous home price limits of the program.? FHA refinancing is available for borrowers who are refinancing a loan balance within the FHA loan limits and can be a good option to consider in addition to conventional financing.
A recent study by the Center for Real Estate and Urban Analysis of the George Washington University School of Business (GWSB), found that more than 30 percent of 2010 mortgages guaranteed by the FHA were made to households making more than 115 percent of area median income. The fourth annual ?FHA Assessment Report? also showed that of those 30 percent of FHA loans, more than half went to households with incomes more than 150 percent of area median income.
The FHA loan guarantee program, introduced in the 1930s, was originally intended to help first-time, low-income and minority homebuyers, according to the GWU study. In 2011, 54 percent of FHA loans were for homes with values greater than 125 percent of their area?s median value, up from 15 percent in 2007.
One reason for the resurgence of the FHA loan program beginning in 2008 was the disappearance of mortgage loans for borrowers without a down payment or with low home equity. In addition, because the loans are insured by the federal government, lenders are generally more lenient with credit score requirements and debt-to-income ratios for FHA loans compared to conventional loans.
FHA loan limits
FHA loan limits are set by Congress each year and vary according to your housing market. While the standard maximum loan amount is $417,000, in areas with high housing costs the maximum loan amount can go up to $729,750 in 2012. In some markets, such as Hawaii, the limits are even higher, at $793,750 for a single-family home. In real estate markets with low-cost housing, FHA loan limits are sometimes as low as $271,050.
Refinancing with FHA
If you are interested in FHA refinancing, you?ll need to start by checking the loan limits for your county. You will only be allowed to include your closing costs in the loan balance if your total new mortgage balance does not exceed the loan limit.
Other requirements for an FHA refinance include:
- Most lenders require a credit score of 620 or 640 or higher to qualify for an FHA loan.
- While this can vary from one lender to another and depends on other factors such as your credit and cash reserves, most FHA lenders require a maximum debt-to-income ratio of 41to 43 percent.
- If you are refinancing from a conventional mortgage to an FHA loan, your home equity must be at least 3.5 percent.
- If you are refinancing from one FHA loan to another, you may qualify for a Streamline Refinance which has fewer documentation requirements.
- If you want to take cash out from your home equity, your maximum loan to value must be 85 percent.
FHA loans require both upfront mortgage insurance and annual mortgage insurance, both of which can be wrapped into your loan payments. If you are refinancing and have not previously paid mortgage insurance, you?ll need to calculate the cost of the mortgage insurance to make sure your payments will be lower than your current mortgage payments.
You can refinance your mortgage into a 15-year or a 30-year FHA loan, so be sure to consider the benefits of a shorter loan term along with comparing conventional and FHA financing.
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