Need to Refinance? Why FHA Is a Good Bet
Refinancing a mortgage can be tough today. Your home may have lost value. Your credit might be a little worse for wear. And even if YOU haven’t changed, your lender probably has. There are extra fees. Tough guidelines. More fees. Mortgage insurance is harder to get than 50-yard line Super Bowl tickets. And did I mention the fees?
FHA Lenders Don’t Pile on the Fees and Surcharges
Freddie Mac and Fannie Mae have adopted a policy of risk-based pricing. This means that everything about your loan that makes it less than perfect costs you money. If you have 50% home equity, a 750 credit score, aren’t taking any cash out, and don’t own a condo, manufactured home, or multi-unit property, this needn’t concern you. The other 99.5% of the refinancing population, listen up.
Here’s an example: You have a credit score of 673, which is about average for FHA borrowers. You want to get a $300,000 cash-out refinance to 85% of your home’s value. If you do it through FHA, you pay an upfront mortgage insurance premium of 1.75% (which can be financed) plus mortgage insurance at .5% each year. On a 5% mortgage rate with no other fees, this gives you an APR of 5.53%.
Now we’ll compare it to a Fannie Mae mortgage. You can find the add-ons on Fannie’s Loan Level Pricing Adjustment matrix (aka the Chart of Doom).
- Credit score between 670 and 680: Add 2.25% or $6,750
- Cash out to 85%: Add 2.5% or $7,500
- Adverse Market Delivery Charge (AMDC): Add .25% or $750
Your grand total of surcharges is a whopping 5%, $15,000, and that’s on top of your customary loan fees and your required mortgage insurance. That gets you an APR of 5.78%. To keep the comparison simple and just focus on the pricing adjustments, I assumed that there are no other loan fees. Of course, there probably are.
When Can’t You Refinance with FHA?
If you have unresolved problems with federally-guaranteed debt, like student loans or government loans, or are past-due on IRS debt, you may turn up on a list called CAIVRS. CAIVRS is pronounced “cavers” but has nothing to do with looking for bats or stalactites. It stands for the Credit Alert Interactive Voice Response System, and every lender has to call in and see if you turn up on it. If you do, and it’s not in error, you can’t get an FHA mortgage, even if you have good credit.
The other thing that may keep you from refinancing with FHA is living on the ritzy side of town. FHA loans are for people who buy modestly priced homes–loan amounts are limited based on the median prices of homes in the area. Find FHA loan limits and see if your mortgage meets the guidelines. Then, if it does, find an FHA lender.
