Credit problems? High-balance mortgage? Refi problems? Try FHA

November 11th, 2010

In the current economy plenty of American homeowners have increased their credit card balances and other debts to make ends meet. Often circumstances may have pushed your credit score down, while mortgage lenders have pushed up scores needed for qualifying. You have equity in your home to consolidate your debt or equity line but are unable to meet the credit or equity requirements of conventional mortgages. Instead of giving up, try plugging FHA mortgage options into your refinance calculator.

High-balance LTV limits

The conforming loan limit is $417,000 for Fannie Mae and Freddie Mac mortgages. Temporary “high-balance” limits of $625,500 are in effect in much of the country, increasing to $729,750 in what are known as “high cost” areas. The high-balance loan amounts have many of the same underwriting criteria as the conforming loan amounts.

For instance, for cash-out refinances for mortgages over the conforming limit Fannie Mae limits the loan to 60 percent of the value of the property, while Freddie Mac limits it to 75 percent of the property’s value. Credit scores for the maximum cash-out limits are 740 for Fannie Mae and 720 for Freddie Mac.

Cash-out refinance

“Cash-out” is not just for getting actual cash out of your property; current guidelines also consider consolidating an equity line of credit or second mortgage into a new mortgage as a “cash-out” transaction (unless the equity line or second mortgage was used to purchase the property). If your first and second mortgages total more than $417,000 and you would like to consolidate the two mortgages with a refinance mortgage you need to have a credit score of at least 720 and your new mortgage cannot exceed 75 percent of your home’s value.

For example, if your mortgages total $465,000 then your home must be worth at least $620,000 to qualify for a Freddie Mac cash-out refinance. Both Fannie and Freddie have rate add-ons for cash-out refinances for high-balance mortgages that elevate the interest rate as much as 1 percent above a no-cash-out or purchase mortgage.

FHA limits

In the FHA scenario, if you have a total of $450,000 in mortgages (or you wish to refinance your current mortgage and credit card debt that total $450,000) and are using mortgage calculators to determine your monthly savings but your home is not worth $600,000 you can still consolidate your mortgages or debt and save money.

In fact, you may have greater savings than using Freddie Mac for your refinance mortgage since FHA does not have any add-ons to interest rate or fees for cash-out transactions. For a $450,000 cash-out refinance with FHA financing your home value needs to be $529,412 or greater to meet FHA’s 85-percent loan to value requirement. FHA will also approve cash-out refinances to borrowers with credit scores as low as 640 or late payments on a mortgage in the past.

FHA payment

“I don’t want to use FHA financing because I don’t want to pay for mortgage insurance.” This is a common statement from homeowners who can benefit from FHA financing, and you may feel the same way especially if you do not currently have mortgage insurance. However, if you look past the mortgage insurance as a separate part of your mortgage payment and instead look at the total mortgage payment you will find that an FHA cash-out refinance can be the same or lower than a Fannie or Freddie mortgage — except that with the FHA mortgage you can consolidate more debt.

When using the monthly payment calculator for an FHA cash-out refinance with at least 5 percent down, there are two additions you need to make to account for the up-front mortgage insurance premium and the monthly mortgage premium. First multiply your mortgage amount by 1.01 and input that as your new loan amount. After solving for your new payment amount, multiply your original mortgage amount by 0.85 percent (.0085) and divide the result by twelve to find your monthly mortgage insurance payment.

Example using free mortgage calculator

Note that with FHA you will have to have your taxes and insurance included in your monthly payment to the lender.

If you are consolidating debt of at least $450,000 and your home is worth at least $529,425 then an FHA mortgage is a worthwhile option to help you save money every month. And remember, with FHA your credit does not have to be perfect.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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