Need Help Refinancing? 5 Reasons to Consider an FHA-Backed Loan

An FHA-backed loan is a good refinancing choice with several advantages for those who might need help restructuring their mortgage.

Almost any refinanced mortgage can:

  • Move you into a lower interest rate (which gives you a smaller payment).
  • Convert you from an adjustable-rate loan into the security of a fixed-rate mortgage.
  • Shorten the length of your mortgage if you go from a 30-year to a 20- or 15-year mortgage.

But an FHA refinance has these 5 added benefits:

1. You won’t have to pay for an appraisal of your home. The FHA’s streamlined refinance program doesn’t make you pay for a new appraisal of your home.

2. You’ll get leniency for a blemished credit rating. You’ll be able to refinance just three years after you’ve filed for bankruptcy. Also, borrowers can have credit scores as low as 580, according to the FHA rules. The catch? Lenders can — and often do — add their own, tougher rules on top of the FHA rules. You’ll have to shop around to find one that takes a credit score of 660 or below.

3. You can refinance an underwater mortgage. If you owe more than your home is worth and your loan wasn’t guaranteed by FHA, Fannie Mae, Freddie Mac, VA, or USDA, you’ll still be able to lower your payments with FHA’s short refinance program.

The challenge? Your lender has to agree to forgive the part of your mortgage that is above what your home is worth. So, if you owe $115,000 and your home is worth $100,000, your lender would have to agree to lower your new mortgage to about $100,000.

4. Minimal equity can serve as your downpayment. FHA allows a 3.5% downpayment, while other loan programs typically require at least 5%. With FHA, your current equity can serve as your downpayment, so just 3.5% equity in your home qualifies you for a refinance. If your loan is for more than $625,500, then your downpayment must be 5%.

5. You may be able to arrange lower monthly payments or a shorter length mortgage. FHA is offering discounted mortgage insurance premiums to its current FHA customers who want to refinance.

Refinancers pay a premium of $1 per $100,000 at closing, and every year, they’ll pay about ½ of 1% in monthly insurance premiums. That’s likely lower than the FHA monthly premiums you’re paying now. However, you may find lower-cost mortgage insurance in the private market so ask you lender what other refinance programs you qualify for.

If your refinanced loan carries a lower interest rate than the loan you have now, you’ll also cut your overall borrowing costs.
If you stay with your same mortgage length when you refinance at a lower interest rate, you’ll get a lower monthly payment.

Opting for a shorter loan term (for example, going from a 30-year mortgage with 20 years left to a 15-year mortgage) probably won’t lower your monthly payment, but you’ll reduce the number of payments you have to make.

The fine print? To take advantage of the mortgage premium discount program, your new loan must have at least one of these three things:

  • A lower monthly payment.
  • A shorter term (say, you go from a 30-year mortgage to a 15-year mortgage).
  • A move from an adjustable-rate mortgage to a fixed-rate mortgage.