Best FHA Mortgage Refinance Options
In this age of lowest interest rates, millions of Americans have already refinanced their mortgages or are doing so now, setting rates lower than before.
But if you have an FHA loan – backed by the Federal Housing Administration, typically going to borrowers with lower credit scores and / or smaller down payments – the process might not be as smooth going forward.
The reason: Almost every investor and business in America is in a race to be secure. And that means FHA loans aren’t the most desirable asset to have on your books because they tend to come with higher risk.
So what does this mean for FHA borrowers? It could mean higher rates than you expected, or additional requirements like a healthier credit score or an updated income check, or longer processing times – or it could mean you’re having a hard time finding one. lender.
“It’s absolutely true that there are big changes going on,” says Rocke Andrews, president of the National Association of Mortgage Brokers and owner of Lending Arizona in Tucson.
“Most lenders now require a minimum credit score of 620 or 640 for FHA loans. Or they eliminate them altogether, lest they show tolerance. “
The reason: The CARES Act requires loan managers to grant a forbearance period of up to 180 days, with no fees, penalties, or documentation required. This is good news for hard-hit borrowers, but less good for loan officers. And since mortgages are often sold from one institution to another, you’ll have a hard time finding a buyer for overdue FHA loans.
“The major lending risks in the coronavirus environment have prompted almost all lenders to tighten eligibility guidelines and even abandon loan programs,” agrees Anthony Bird, owner of Riverbank Finance in Grand Rapids, Michigan. “Hardest hit by these changes are the government – back-to-back loans, which are designed to help borrowers with lower credit scores and down payments.
Ironically, the federal guidelines for FHA loans have not changed, requiring a credit score of only 500. But the final decision rests with the lender – and while in the past they could have accepted ratings of around 580, says Andrews, those expectations have now risen. .
Another potential problem in your refinancing plans: Social distancing has erased work on mortgage pipelines. When in-person activities are restricted and staff members all work remotely, it has become much more difficult for lenders to process and close deals.
All the swirling economic winds don’t mean you can’t get your FHA loan refinanced. It just means that it’s probably more difficult to strike a deal. Some thoughts from the experts:
Expect a price surprise
According to the Mortgage Bankers Association and its Weekly Mortgage Application Survey, the average rate for a 30-year fixed compliant loan is 3.49%, while an FHA loan is 3.54%. Historically, FHA loans were generally offered at slightly lower rates, says Andrews – but this is not the case at the moment, reflecting lenders’ mistrust.
Note that these numbers are not always related to what is happening with federal interest rates. Sometimes lenders increase them “artificially,” says Andrews, as they get overwhelmed and have to slow their pipeline down to an amount they can handle. Ideally, those numbers will recede again, once the pipelines are cleared and pandemic fears have subsided.
Be prepared for more documentation requests
The staggering number of new jobless claims – nearly 10 million in two weeks, shattering all previous records – means lenders want to see the most up-to-date employment and income information possible. So if your documentation is a few weeks out of date, expect to be asked for a more recent confirmation.
“Now more than ever, the faster the better,” advises Joel Kan, associate vice president of the Mortgage Bankers Association. “Have your documentation ready to go and respond to all of your lender’s requests, which will help you operationally. Because every little delay will add up.
Compare the prices
It’s a fast-paced environment, and things change not only from week to week, but even day to day. So don’t be surprised if your lender changes their position on FHA loans, even if yours is already outstanding.
One strategy to mitigate these risks: Work with an independent mortgage broker, who usually deals with multiple companies, giving you more flexibility. “I buy from four or five different lenders, and every day their prices and guidelines are different,” says Andrews. “So be prepared to check out more than one option.”