FHA Refinance Options For Poor Credit
As housing prices fall and lenders tighten credit standards, you have to work harder to get mortgage refinancing than a few years ago, especially if you have poor credit. But with interest rates at near-historic lows, this is not the time to give up.
Consider FHA refinancing. The Federal Housing Administration doesn't actually fund these loans, but insures them for borrowers working with FHA-approved lenders. Because of the government guarantee, lenders are willing to consider borrowers with lower credit scores than they would for traditional loans.
FHA Refinancing: Know Your Options
There are three main types of FHA refinancing--streamlined, streamlined with an appraisal, and cash-out refinancing. To benefit from the streamlined process, the mortgage you're refinancing must already be FHA insured, and you must be current on the payments--no delinquencies in the last 12 months. If you use this option, you must refinance only the amount you owe--you can't take any cash out. This is a good alternative if you want to lock in a better interest rate to lower monthly payments and if you don't have a lot of equity. A big plus of the streamlined refinance is it doesn't require a property appraisal, so you can refinance even if your home has lost value. However, you need to move fast--that advantage is going away on November 17, 2009.
Those who opt for streamlined refinancing with an appraisal do so in order to roll their refinancing costs into the new loan. However, if you don't have a lot of equity or extra cash, you still have options. Some lenders, instead of adding closing costs, charge a slightly higher interest rate and absorb your costs for you. If you've got plenty of equity, you can get a lower interest rate and finance the closing costs as part of the new mortgage.
Consolidate Debt with an FHA Cash-Out Refinance
Consider an FHA cash-out refinance if you've got a good chunk of equity and need to tap into it. With this type of mortgage refinance, you can take out a loan for more than you owe on your home and use the extra money to consolidate debt or pay for expenses like college tuition or medical bills. Unlike the streamlined version, a cash-out refinancing requires an appraisal, and to qualify you can't finance more than 85% of your home's value.
FHA Lending Restrictions
Be aware that since the mortgage crisis unfolded, some FHA-approved lenders are imposing restrictions beyond the FHA guidelines and are requiring more documentation of income or higher credit scores--your best bet is to shop for a lender that doesn't do that if you have credit problems. Remember, too, that the amount of your loan must be under the FHA lending limits, which vary by location from $271,050 in the least expensive housing markets to $729,750 in the priciest areas of high-cost regions, such as New York or the San Francisco Bay Area in California.
Rates vary among approved FHA lenders, so shop around. Start by filling out the form on this page to get up to four free quotes from competing lenders.
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