FHA financing can be a tricky lending program to figure out. Luckily, the FHA has published their own refinance requirements, but lenders tend to withhold this information from customers so as not to complicate matters past the necessary steps to get a loan. We’ll explain exactly what you need to know to get a refinance through the FHA.
Like all lending programs, the FHA has stringent lending requirements for refinances. Many of these are based on ratios, or hard number scores like your credit score. Here are the number-based requirements you need to know:
Mortgage debt to income – The first ratio you need to beat is 31%. This ratio of 31% means that your debt payment cannot be greater than 31% of your monthly income. If you make $5000 per month, then your mortgage payment cannot exceed 31%, or $1550 per month.
Total debt to income – The next ratio is your total debt to income, which looks at factors like your credit card debt, car loan debt, and other obligations. This ratio is higher, but it also includes your mortgage payment. The ratio to beat here is 43%, meaning that less than 43% of your income must be dedicated to the repayment of existing debts, including a new mortgage refinance.
Credit history – Your credit history is vitally important for FHA loans. A FICO score of 640 or better will be approved immediately. Lower scores are not automatically approved, and may be rejected. Do note that having a higher score is always better, and seek to improve your credit when possible to stay above 640. Chances are good that if you have consistently paid on your existing mortgage, your credit score will be higher than 640.
Positive Equity – Banks will not refinance a loan on a home with negative equity, regardless of whether you’re seeking a conventional loan or an FHA loan. To have positive equity is to own a home in which the value of the home exceeds the debt owed on the home. A home worth $300,000 with a $200,000 existing loan balance would have 33% equity, or $100,000. However, a home worth $200,000 with $300,000 of outstanding debt would have negative equity of 33%. you must have positive equity in the home, but do be sure to speak to a lender about available government grants and benefit programs for people with negative equity.
There are qualitative factors to take into consideration when seeking out an FHA loan. These include the following criteria, and may include others, depending on how you score with the above quantitative factors:
Be at least 18 years old (This is non-negotiable, as it is the age necessary to legally commit to a contract.)
Be a US resident, and maintain your citizenship. If you are not a resident, you will have to complete additional paperwork to prove that you are living legally in the United States.
Have a Social Security Number or SNN, or in some cases, a foreign Tax ID.
Shopping for, and ultimately signing on to, a mortgage does not have to be a painful experience. Even though the regulatory environment for banks has changed drastically, the vast majority of homeowners are capable of refinancing their homes without any hassle on their end. In the worst case scenario, some homeowners will have to get an appraisal to confirm the market value of a home, as well as an inspection to prove the home is constructed well. Otherwise, most homeowners will apply and receive an FHA loan with a mere signature on a dotted line.
Refinancing a home through the FHA is a great way to reduce your interest expense, and pay off a home faster. Whether you have an existing FHA loan, or hope to convert a conventional loan to an FHA loan, there has never been a better time to start thinking about a refinance. Of course, the sooner you begin the process, the quicker you’ll be approved and your loans refinanced.