FHA Home Refinance

A viable alternative to foreclosure is FHA home refinance options. Typically, it was quite difficult to refinance a loan to a FHA insured mortgage if it was not already insured. Furthermore, these types of loans were almost always set aside for first time buyers, which refinancing obviously does not include. However, congress passed the HOPE for homeowners act. This act made a provision for homeowners facing foreclosure to take a second mortgage backed by the Federal Home Administration, which was insured and had a fixed rate. This is not an indefinite ruling. The HOPE for homeowners act is only in effect for a limited amount of time before rules and regulations become more restrictive, though this is projected to include over 400,000 homeowners. The benefits of this type of ruling are numerous.

Rather than having to hire another appraiser, deal with a new set of closing costs and potentially accruing a new set of fees, this act allows borrowers facing foreclosure to simply convert their existing loan to an FHA home refinance loan with a 30 year term. Not only do FHA loans carry lower interest rates, but are also insured. Having an insured loan with a lower interest rate just may be the homeowner's ticket to a smaller, more manageable monthly mortgage payment. The borrower considering this type of refinance can borrow up to 90% of the home's appraisal value. This is helpful, as the homeowner may not have that much equity in the home, and would otherwise be penalized through standard lending options.

Not everyone is eligible for FHA home refinance loans. The mortgage payment for the property facing foreclosure must be at least 31% of the borrower's income. This weeds out those homeowners that could otherwise pay the monthly mortgage payment, but choose other items instead. For example, someone may have the income to pay the house payment, but would rather have a boat and motorcycle instead. With this type of imprudent budgeting, the FHA has discovered that the potential borrower is too much of a liability and an unnecessary expenditure of limited government funds. This also appeals to those individual who financed a loan that was ill fitted for her income bracket, or a variable rate loan that increased out of her ability to pay. Limiting the loans to the individual paying more than 31% of his or her income toward mortgage payments also helps the person who has lost his job or has had to take a lesser paying job during times of economic downturn.

The house in question has to be the residence of the potential borrower. FHA home refinance has the same stipulation as the original insured mortgage plan does. The house has to be the primary dwelling for the borrower. The FHA is really an insurance entity constructed to help those families who would not normally qualify for standard lending to buy a home and raise a family. This government administration is not, however, an entity that caters to the needs of real estate investors or individuals in higher income tax brackets. Therefore, FHA home refinance does not cover investment property, rental houses or vacation spots. The potential borrower must actually live in the house. This requirement has to do more with risk and wise lending. The FHA knows that the risk of default is much less when the house is the primary residence. An investor or renter has no loyalty to the bank or lending institution, whereas a homeowner sincerely wants to keep the mortgage in good standing for their credit score and the safety of their family.

The potential borrower must also be able to verify their income, as well as show proof that they never intentionally missed a mortgage payment. Since the FHA home refinance is being insured by a federal establishment, there are only certain funds available. For this reason, the Federal Home Administration wants to find those individuals who are hard working and honest individuals who simply got in over their head. With the subprime housing market falling to pieces, the HOPE for homeowners act is simply a way to reward the diligence of those individuals who were mislead by predatory lenders, and to stop the debacle of the housing market as early as possible.

Even if a potential borrower qualifies for FHA home refinance, it is still up to the lender to approve the loan. The bank may lose money if it allows the mortgage holder to convert to a FHA insured mortgage. However, chances are that the lender will lose less money than if the borrower defaults and the bank forecloses on the house. During a foreclosure, the bank is not getting paid; and during a slow housing market, the lender may be stuck with that property for months or even years. This is a good incentive for the lender to agree to FHA home refinance. However, it is always a good idea to be honest and deal with a lender genuinely, as no bank is required to offer these types of refinancing packages. If it is a good housing market, the borrower facing foreclosure may find it harder to convince their lender to comply with their request.

Because there is a 10% equity built into the loan, the future equity and appreciation of the home will be shared with the Federal Home Administration. This is only fair, as they are responsible for salvaging the home for immanent foreclosure. They were also willing to insure a loan on property that had already been bound for foreclosure. As with all loans, even insured refinancing options should be looked at carefully and compared to all the options to arrive at the most financially beneficial outcome. "Therefore whosoever heareth these sayings of mine, and doeth them, I will liken him unto a wise man, which built his house upon a rock." (Matthew 7:24)




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