Using Government Loans to Refinance a Home
Government loans that are administered by the Federal Housing Administration (FHA), the Department of Veteran Affairs (VA), and the U.S. Department of Agriculture (USDA) are outstanding for buying a home. However, what most people don’t know is that these loans can also be used to refinance a home. Each one of these loans offers multiple refinancing programs that provide different benefits for applicants who apply for them.
FHA Refinance
Using an FHA refinancing loan allows borrowers to use the equity that is left on their home to get some cash-out, to adjust the repayment term or to receive lower rates. Additionally, these loans can also benefit applicants who have a less than stellar credit score of 580 or, at times, even less.
FHA currently offers several different types of Refinancing loans, which include a Cash-Out Refinance, a Streamline Refinance, and a Simple Refinance. Each one of these loans has its own benefits and potential drawbacks. Therefore, it is crucial to know the difference between each one of them.
- Cash-Out Refinance
This type of refinancing is excellent for anyone whose property has increased in value of the years they have owned it. This loan works by letting the borrower take out a more significant loan amount to refinance their existing mortgage.
Cash-out refinance loans require that the borrower have at least 15% of remaining equity based on the new appraisal on the property. Moreover, to qualify, the applicant must show a history of making all monthly payments on time for the last 12 months.
Most lenders allow qualifying applicants to borrow up to 85% of the home’s current value since they need to have at least 15% equity. However, FedHome Loan Centers offers a special refinance program that allows the applicant to cash out up to 97% of the equity.
The money that is taken out can be used for any purpose. Common uses are student tuition, medical debt, home improvement expenses, a new car, etc.
- Streamline Refinance
This is a more efficient type of refinance option since it cuts down on the amount of paperwork that is needed and, at times, does not even need an appraisal to be done on the property. By reducing the amount of paperwork required, this loan cuts down on time as well as costs.
Some of the paperwork that is not needed for this process includes bank documents like income, employment verification, bank account, and credit score verification.
Most homeowners will find that this program works at reducing their FHA mortgage insurance premiums. It also offers both 15 and 30- year fixed and adjustable mortgage options. Additionally, there are no prepayment penalties for people who use a streamline refinance through the FHA.
- Simple Refinance
Known as the most straight forward type of FHA refinance loan. This refinance is also called a rate and term refinance. This loan allows the homeowners to refinance their current loan and replace it with a new one. It does not matter whether the loan is a fixed-rate or adjusted rate mortgage. There are no cash-back options available with this type of refinance loan.
Applying for this type of home loan will require that the applicant goes through an income, credit, and asset analysis to determine credit qualification.
Once eligibility is determined, the homeowner will be able to enjoy lower monthly payments. This will be mostly due to the lower interest rates that they receive after the refinancing and the recasting of the debt.
Applying for this type of home loan will require that the applicant goes through an income, credit, and asset analysis to determine credit qualification.
Once eligibility is determined, the homeowner will be able to enjoy lower monthly payments. This will be mostly due to the lower interest rates that they receive after the refinancing.
USDA Refinance
Home loans guaranteed by the USDA are outstanding for borrowers who fall under the low to medium income bracket. This loan offers some great incentives, which include a no down payment requirement and lenient eligibility requirements. These loans are known for allowing borrowers who wouldn’t have otherwise qualified the opportunity to become homeowners.
When it comes to refinancing, USDA loans offer some great options which can lower the homeowner’s rates. These refinancing loans include options like the streamline refinance, the streamline-assist, and the non-streamlined refinancing loan.
- Streamline Refinance
This type of refinancing loan is like the FHA Streamline Refinancing loan, in that it allows for the lowering of the homeowner’s rate. It also does not require a new appraisal to be done on the property. However, the loan does require that the applicant stay current in their previous 12 months of mortgage payments.
Additional eligibility requirements include that the mortgage that is being refinanced must already be a USDA loan. The homeowner must also meet the USDA’s debt-to-income ratio and credit score requirements to be able to enjoy this refinance loan. Furthermore, the maximum loan amount cannot exceed the amount of the original loan at the time of purchase.
- Streamline-Assist Refinance
The favorite among USDA refinance loan borrowers, this loan can lower the homeowner’s rate without the need for a new appraisal, credit check, or debt-to-income calculations. Also, this refinancing loan can be used by borrowers who have little to no equity on their current mortgage.
Eligibility for these loans is like streamline loans, with a few extra caveats, including a required minimum result of $50 less in the borrower’s monthly payments. If the homeowner is refinancing a USDA direct loan, the property will have to go through an appraisal. And lastly, borrowers can only be added to the mortgage; they cannot be removed.
- Non-Streamline Refinance
This type of refinance loan is like the previous two refinancing loans in what it promises. However, one significant difference is that borrowers are required to get a new appraisal on their property to qualify for their loan.
This is commonly used by homeowners who do not think they can meet the minimum $50 reduction requirement for streamline-assist refinance.
VA Refinance
VA home loans are known for being some of the best Government guaranteed home loans available with benefits like no down payment requirements, lower monthly payments, low-interest rates, and no prepayment penalties. However, the VA also offers some great refinancing options for people looking to lower their rates on their current mortgage.
VA refinance loans offer some great benefits for those who want to take advantage of low interest rates offered by lenders or to cash out their equity. There are two refinance loans provided by the VA; they are the Interest Rate Reduction Loan and the Cash Out VA Refinance Home Loan.
To apply for VA refinance loan, the applicant must be a Veteran, an Active Duty Service Member, a member of the National Guard, a military reserves, or an eligible surviving spouse.
- Interest Rates Reduction Loans (IRRRL)
Like the Streamline Refinance Loans provided by the USDA and the FHA, these loans do not require an appraisal most of the time; they also do not require a Certificate of Eligibility. These loans cannot be used to cash out on equity, and they allow homeowners to borrow up to 100% of their current loan amount. Also, there is a .5% funding fee, which applies unless the applicant is exempt.
The applicant must prove that the property is currently or previously occupied by them. Additionally, the applicant must demonstrate that they have made mortgage payments on time for the last 12 months with no more than one 30-day late payment.
- Cash-Out Refinance Loans
This loan is for borrowers who want to cash out on home equity from either a conventional or a VA home loan. This refinance loan becomes the applicant’s new mortgage regardless of whether the original one is an FHA, USDA, VA, or a conventional loan. Homeowners can refinance up to the full value of their current homes with these loans. This is great for homeowners who need some extra money to pay off debt, finance home improvements, or address a financial emergency.
Eligible applicants for these loans can also include the funding fee and the closing costs in the loan amount. Additionally, these loans also follow underwriting guidelines, which are established by the lender and the Department of Veteran Affairs.
Conclusion
Government loans allow borrowers the opportunity to become homeowners. However, they also give current homeowners the ability to lower their monthly rates and payments. The ability of these loans to provide borrowers with the great benefits that they do is because they are guaranteed by the Government. The lenders who administer these loans are protected in case the borrower ends up defaulting on their loans.
Phil Georgiades is the CLS for FedHome Loan Centers, a lender that specializes in first-time buyer home loans. He has been a practicing real estate professional for 22 years. To learn more about programs available to you or apply for a home loan, click here.