Yahoo Finance 6 Things You Need To Do When Considering a Government-Backed Refinance
If you’re considering refinancing your government-backed or conventional mortgage, a government-backed refinance could be a good choice. These loans, guaranteed by agencies like the FHA, VA and USDA, offer refinancing solutions with specific requirements.
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Here are six things you need to do when considering one of these refinance options:
What Is a Government-Backed Refinance?
A government-backed refinance is when you refinance an existing mortgage with a new loan guaranteed by a government agency, including FHA, VA and the USDA.
Here’s more about the refinancing options each agency offers:
VA Loans
VA loans, guaranteed by the U.S. Department of Veterans Affairs, offer some refinancing options.
A VA Interest Rate Reduction Refinance Loan — aka IRRRL — simplifies the refinancing process for those with existing VA loans. These types of loans don’t require a home appraisal, income verification or a credit review. However, the new interest rate related to the refinance must be lower unless you’re converting from an adjustable-rate mortgage.
A VA cash-out refinance allows borrowers to take out a new loan for more than they owe and keep the difference as cash. Up to 100% of the home’s appraised value can be borrowed, although lender limits may vary. This option requires a home appraisal and credit check.
USDA Loans
The U.S. Department of Agriculture supports refinancing for USDA loan holders in rural areas through the following programs:
A USDA streamline assist refinance doesn’t require a home appraisal or credit review as long as you’re current on your mortgage payments. However, the refinance must provide a “net tangible benefit,” saving the borrower at least $50 monthly.
A USDA streamlined refinance includes a credit review and debt-to-income ratio assessment but generally no home appraisal. It does not require proof of a net tangible benefit.
A USDA rate-and-term refinance requires a credit check and home appraisal.
FHA Loans
Backed by the Federal Housing Administration, FHA loans have three main refinancing options:
An FHA streamlined refinance is a quick and straightforward refinancing option for current FHA loan holders. The non-credit-qualifying version skips income verification, extensive credit reviews and home appraisals.
An FHA rate-and-term refinance enables borrowers to borrow up to 97.75% of the home’s value and requires income verification, a credit check and a home appraisal.
An FHA cash-out refinance allows you to borrow up to 80% of the home’s value and offer cash in hand by refinancing for more than the current loan balance.
What To Consider Before a Government-Backed Refinance
If you want a government-backed refinance, here’s what to consider:
Your Financial Goals
Determine why you want to refinance. Common reasons include lowering monthly payments, accessing home equity or changing loan terms.
For example, if mortgage rates have dropped since you originally financed your mortgage or your credit score has dramatically increased, it can be a good idea to find out what rate you will qualify for if you refinance.
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Seasoning Period
You’ll want to make sure you’re past the seasoning period on your government-backed mortgage loan before attempting to refinance. The seasoning period is a period you have to wait before refinancing.
For VA loans, the seasoning period is at least 210 days after your first payment before applying for the IRRRL and 210 days after your closing date before applying for a VA cash-out refinance.
Before applying for an FHA cash-out refinance, you’ll need to make at least six payments. With an FHA streamlined finance, you’ll need to wait 210 days from your closing dates and complete at least six payments.
If you have a USDA loan and want to refinance, you’ll wait at least a year.
Your Break-Even Point
To calculate your break-even point, you’ll need to know how much you’ll save per month by refinancing and the amount of the closing costs for the refinance loan. First, use a mortgage refinance calculator for how much money you’ll save by refinancing. Then, use a mortgage refinance cost calculator to estimate closing costs.
Divide the amount of your closing costs by your monthly savings to get the number of months it will take to break even. If you’re planning to stay in your home for longer than the amount of time it takes to break even, you’ll save money by refinancing.
Eligibility Requirements
Ensure you meet the specific criteria for the government refinance program relevant to your loan type. Requirements may include:
Minimum credit score – VA lenders typically require a minimum score of 620, while FHA lenders may accept a score as low as 500 with 10% down.
Debt-to-income ratio limits – Generally, your DTI needs to be below 43%, but some lenders may require it to be less than 36%.
Home equity percentage, if applicable – You can borrow up to 80% of your home’s appraised value, less closing costs, with an FHA cash-out refinance and up to 100% with a VA cash-out refinance.
Required Documentation
Examples of the documentation you’ll need to refinance include the following:
Current mortgage statement
Income verification (pay stubs, tax returns)
Assets and debts
Homeowners insurance
You’ll also need to submit to a credit check.
Loan Estimates
Compare loan estimates from multiple lenders to find the best terms and interest rates. According to the Consumer Financial Protection Bureau, you should consider factors like:
Loan amount
Interest rate
Monthly principal and interest payment
Monthly mortgage insurance payment
Total monthly payment
Upfront loan costs
Lender credits
Cash to close
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