FHA Mortgage Refinance

An fha mortgage refinance loan is obtained through lenders who have been especially approved by the Federal Housing Administration to offer mortgages to approved applicants. In 1934, in response to economic conditions arising from the Great Depression, Congress passed the National Housing Act which created the Federal Housing Administration. At that time, many people had lost their homes through foreclosure and the banking system was being restructured. The housing industry was very different than it is today. Home buyers could only borrow up to fifty percent of a property's value which meant they had to have a hefty down payment. The term of the loan, incredibly, would only be for three to five years with a large balloon payment due at the end. No wonder, then, that only four out of ten households owned their own homes.

In 1965, the Federal Housing Administration was placed within the newly-created U.S. Department of Housing and Urban Development, better known as HUD. By providing insurance to lenders that loans would be repaid, the door was opened to families to buy homes with little cash investment. The nation's homeownership rate has improved drastically since 1934. According to government statistics, the homeownership rate was almost 70 percent in 2001. This giant change can be largely attributed to the assistance that the Federal Housing Administration has provided to families who wanted to become homeowners. In today's market, the agency is providing assistance with fha mortgage refinance programs to help families who have been hurt by the rising rates of their adjustable rate mortgages.

The Federal Housing Administration is unique in government in that it operates from self-generated income instead of revenue from taxpayers. The homeowner pays for the mortgage insurance as part of his monthly house payment. Usually, this insurance is paid until the total amount is less than 78% of the value of the property or for five years (whichever factor takes longer to reach). To offer an fha first mortgage or an fha mortgage refinance, a lender has to meet certain criteria set down by the agency. By being an approved lender, the institution has less risk if the property owner defaults on the loan since the agency is providing insurance against any such loss. The underwriting rules for approval are less stringent than those for a conventional loan. Applicants whose credit history or annual income prevents them from being approved by a conventional lender may be able to purchase a home with an fha mortgage.or to obtain an fha mortgage refinance loan.

The housing lending industry looks at two important ratios when determining eligibility for a home loan. The first is the ratio of the monthly PITI to the individual's gross monthly income. The acronym PITI stands for payment, interest, taxes, and insurance. The second ratio is PITI added to other debt obligations compared to the gross monthly income. Generally speaking, the approved lenders for fha mortgages or for fha mortgage refinance loans allow more generous ratios. As a general guideline, the agency wants the first ratio to be within 31% meaning that PITI is 31% or less than the gross monthly income. The agency wants the second ratio, which includes PITI, car loans, student loans, and any other monthly obligations, to be 43% or less of the gross monthly income. In some instances, the ratios may be even more generous. There is also a cap on the amount that can be borrowed. Generally, the agency sets a cap based on the median cost of other homes in the area.

The agency also has certain guidelines regarding fha mortgage refinance products. Some lenders advertise that the home owner can refinance and get up to 95% of the property's current value. In these types of loans, the homeowner can get a new loan that pays off the current loan and pocket any difference. If a homeowner has both first and second mortgage, both loans can be repaid so that the individual only has one monthly payment. Again, if there is enough equity in the property, the homeowner could end up with additional cash that can be used to consolidate other debts or for some other personal purpose. Great care should be taken when borrowing money against one's home for anything other than maintaining or improving the value of the property. Doing so can be a risky financial maneuver. A psalmist prays: "Teach me good judgment and knowledge: for I have believed thy commandments" (Psalm 119:66). There are many financial experts who can provide helpful advice for using money with good judgment and wisdom. These resources may keep someone from making a costly financial mistake.

Lenders also promote streamlined refinancing opportunities through the agency, but these come with additional restrictions. For one thing, a person who qualifies can obtain an fha mortgage refinance even if the current loan is not with the agency. But the streamlined financing is only for individuals who have an existing loan through the agency. Another important criterion is that the homeowners cannot be delinquent in their mortgage payments to be eligible for the streamlined refinancing. In addition, the replacement loan must result in a lower principal and interest payment for the borrower and no cash can be taken out of the equity. For example, suppose an individual has a monthly payment with the principle and interest equaling $800. The amount she sends to the mortgage company each month is higher because it also includes money for the escrow account which pays taxes and insurance when these items become due. A new streamlined fha mortgage refinance loan would need to result in a payment, of the principle and interest, that is less than $800. Even though the homeowner may have $50,000 of equity in the property, she cannot access that money by borrowing more than what is needed to pay off the original mortgage. A benefit of streamlined refinancing is that the amount of documentation and underwriting that is required will not be as stringent as it would be otherwise.

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