FHA rules allow borrowers to use the FHA streamline if they have a second mortgage, home equity line (HELOC), or home equity loan. However, there are limitations. The maximum loan amount of the first and second mortgage combined can be no more than 125% of the property’s current value.

Compare that with the standard FHA streamline rule, which states a borrower can refinance no matter how much their loan amount exceeds the home’s value.

Check your FHA streamline refinance eligibility today (Sep 16th, 2024)

Can you get an FHA streamline refinance when you have a second mortgage?

If a borrower has a $200,000 FHA loan and a second mortgage, the first loan may still be eligible for a streamline up to 125 percent of the original purchase price. Using this same example, the second mortgage may be as high as $50,000 while the FHA first mortgage is still streamline refinance eligible.

If the second mortgage causes the CLTV to exceed 125 percent, the mortgage must be paid down in order for a borrower to successfully close an FHA streamline refinance.

What if the second mortgage exceeds limits?

Keep in mind that the FHA streamline refinance can’t pay down or pay off the second mortgage. The second mortgage holder will have to subordinate the loan. This means that the lender will request a document from the lender stating that the second mortgage or HELOC will be in second position behind the new FHA first mortgage.

“Second position” simply means the order in which the loan will be paid off in case of foreclosure. If the borrower fails to pay the mortgage and the home is foreclosed on, the bank will pay off the primary mortgage first. In these situations, second mortgages often don’t get paid off.

The higher risk contributes to higher rates for second mortgages. They are viewed as higher risk. Conversely, first mortgages typically come with low fixed rate, since they are the first to be repaid in a foreclosure or short sale situation.

Why is this important? The first mortgage lender, in this case FHA, needs their loan to be in first position to give you the best available rate on the FHA streamline.

Check today's FHA streamline refinance rates (Sep 16th, 2024)

Subordination issues

Typically, second mortgage lenders will comply with the subordination request. But there have been instances where they refuse to subordinate. It is within their right to deny a subordination request. However, you can help the success of the process.

Typically your refinance lender will request the subordination from the second mortgage holder. The second mortgage lender or servicer will sometimes issue a subordination denial to a third party, i.e. your refinance lender. But as the customer, you may have better luck pushing your subordination request through. Ask your refinancing lender for your second mortgage holder’s subordination department contact information.

Successful FHA refinancing with a second mortgage

Performing an FHA streamline while you have a second mortgage on your home is a little more complicated, but it can be done. With the right FHA lender and a bit of extra effort, homeowners can drop their mortgage payment even under these circumstances.

Check your FHA streamline refinance eligibility today (Sep 16th, 2024)

The post Get an FHA Streamline Even if You Have a Second Mortgage first appeared on My Mortgage Insider.

Home buyers pay an upfront mortgage insurance premium when they close on an FHA loan. This upfront fee — known as UFMIP or MIP — equals 1.75 percent of the loan amount.

This fee is refundable when you refinance into another FHA loan, like the FHA Streamline Refinance or the FHA Cash-out Refinance, within three years of closing your FHA home loan.

Your refundable amount will get smaller each month, and you will no longer be eligible for any refund amount after three years.

See if you’re eligible for an MIP refund and an FHA refinance loan today (Sep 16th, 2024)

FHA MIP Refund Chart 2024

Source: HUD 4155.2 7.2.i Elimination of UFMIP Refunds

Why does the FHA refund upfront mortgage insurance?

The word “refund” can be misleading. The Federal Housing Administration won’t send you a check in the mail. Instead, it’ll let you “re-use” part of the upfront MIP you’ve already paid.
You can reuse the FHA insurance premium only if you’re refinancing into another FHA loan — and only if you refinance within three years.

The FHA allows these partial refunds because MIP has a purpose. This fee helps lenders offer lower interest rates to borrowers who have riskier applications. It’s the main reason FHA loans can be a really good deal for home buyers with lower credit scores.

But the benefits of upfront MIP build slowly; your savings accrue gradually, with each monthly mortgage payment you make.

If you don’t keep your loan long enough to benefit very much from its lower interest rate, the FHA will refund part of the fee so you can re-use the money on your next FHA loan.

How to calculate your FHA MIP refund

To calculate your MIP amount for your new FHA refinance loan, you’ll need to know the following figures:

1. Your original MIP amount paid. You can find this listed on your original loan documents. Your loan officer can help you determine this.
2. The number of months since your loan’s closing date.
3. Your refund percentage (see chart above).

Multiply your original upfront MIP amount by the eligible refund percentage to determine your total refund amount.

For example, if your original MIP amount was $2,500 on a loan that closed 10 months ago, then your eligible refund percentage is 62%. Your MIP refund amount is $1,550 ($2,500 x 0.62).

This refund amount will be applied to the upfront MIP due on your FHA refinance loan.

How to calculate your new FHA loan MIP amount

To calculate your MIP amount for your new FHA refinance loan, you’ll need to determine the following figures:

1. Your new loan’s upfront mortgage insurance premium (UFMIP) amount — this is calculated by multiplying your base loan amount by 0.0175 (all FHA mortgages charge 1.75 percent for UFMIP)
2. Your MIP refund amount (see above section for how to calculate)

Next, subtract your MIP refund amount from your new mortgage loan’s UFMIP amount. This amount is the total UFMIP you owe on your new refinance loan.

For example, if your new refinance loan is $200,000, then your new UFMIP amount is $3,500 ($200,000 x 0.0175). Now, let’s say your MIP refund amount is $1,800. 

That means, you’ll only have to pay $1,700 UFMIP towards your new refinance loan ($3,500 – $1,800 = $1,700).

Eligibility requirements for FHA MIP refunds

The FHA has specific eligibility requirements for MIP refunds both for your original FHA loan and your new FHA refinance loan. To be eligible, your current FHA loan must:

• Have closed less than three years ago
• Be up-to-date on all mortgage payments with no serious delinquencies
• Not have entered foreclosure
• Not be an assumed FHA mortgage

Other things to note:

• You must refinance into another FHA loan to receive an MIP refund
• MIP refunds will be applied to the UFMIP on the new FHA refinance loan
• For FHA Streamline Refinances, MIP refunds are available after the 7-month waiting period required for these loans
• Your refinance loan closing must happen by the end of the 36th month after the current FHA loan was opened

See if you're eligible for a FHA refinance loan (Sep 16th, 2024)

Can I get the FHA MIP refund in cash?

FHA MIP refunds are not eligible as cash refunds. Rather, they are credited directly toward the UFMIP on your new FHA loan. 

The HUD underwriting guidelines state: “If the borrower is refinancing his/her current FHA loan to another FHA loan within 3 years, a refund credit may be applied to reduce the amount of the UFMIP paid on the refinanced loan.”

Who do I contact with questions regarding my MIP refund?

The U.S. Department of Housing and Urban Development (HUD) is the administrator of FHA loans. HUD has created a Mortgage Insurance Premium Refund Support Service Center where you can ask questions about mortgage insurance refunds. You can contact HUD with your questions in one of the following ways:

• Call 1-800-697-6967
• Email sf_premiums@hud.gov
• Search their database

To search this database, you will need your FHA case number which should be part of your original loan documentation.

Upfront mortgage insurance premiums vs. annual insurance premiums

In addition to the upfront mortgage insurance premiums of 1.75 percent, all FHA loans charge an annual FHA mortgage insurance premium. Each premium charges a different percentage on the base loan amount and has specific requirements.

These annual premium amounts vary based on your loan term and down payment amount:

• 30-year loan with less than 5 percent down: Annual fee of 0.85 percent for the entire loan term
• 30-year loan with 5 to 10 percent down: Annual fee of 0.8 percent the entire loan term
• 30-year loan with 10 percent or more down: Annual fee of 0.8 percent for 11 years 
• 15-year loan with less than 10 percent down: Annual fee of 0.7 percent for the entire loan term
• 15-year loan with 10 percent or more down: Annual fee of 0.45 percent for 11 years

The FHA divides these annual fees into 12 monthly installments. Each monthly mortgage payment will include an MIP installment. 

For example, a loan of $200,000 with an annual fee of 0.85 percent requires $1,700 in annual insurance fees the first year. To cover this cost, the FHA will add about $142 to each monthly payment.

Keep in mind all FHA insurance premiums are calculated based on your loan amount which, because of your down payment, should be smaller than your home’s purchase price. In addition, while your MIP rate stays the same, the actual amount you owe each year will go down as you pay off your loan balance over time. 

FHA MIP refund FAQs

How is FHA MIP refund calculated?

The partial refund of your upfront mortgage insurance premium grows smaller by 2 percentage points each month. After 36 months, you’re no longer eligible for an MIP refund. Scroll up to see a chart of refund amounts by month.

Can you get money back on an FHA loan?

The Federal Housing Administration insures a cash-out refinance loan. Like all cash-out refis, this loan works by borrowing against the home equity you’ve built up. If you have enough equity to meet the FHA’s and your lender’s rules, you can get cash back at closing.

Is an FHA upfront mortgage insurance premium refundable?

Part of your FHA loan’s upfront mortgage insurance premium can be reused if you refinance into another FHA loan within three years. The amount of your FHA MIP refund grows smaller each month.

How is FHA MIP calculated?

The FHA’s MIP adds 1.75 percent of the loan amount to your loan upfront. This fee can be paid as part of your loan’s closing costs or it can be rolled into the loan amount. The FHA also charges an annual mortgage insurance premium. For borrowers with 30-year terms who made the minimum down payment of 3.5%, the annual MIP will tack on 0.85 percent of the loan amount each year.

How do I get my FHA MIP refund?

Most FHA-authorized mortgage lenders will automatically apply your FHA MIP refund to your new MIP amount due. If you’re refinancing your FHA loan into another FHA loan, ask your loan officer to make sure your refund gets applied to your new upfront MIP.

Can you get money back on an FHA loan?

If you have enough home equity, you can get a cash-out refinance to borrow against your equity. FHA purchase and Streamline Refinance loans do not allow cash back at closing.

Can FHA MIP be removed?

Your FHA loan’s annual MIP will remain for the life of the loan unless you put more than 10 percent down. In that case, the premium goes away after 11 years. You can also refinance into a conventional loan to eliminate MIP. Conventional loans will not require private mortgage insurance (PMI) if you have at least 20 percent in home equity. In addition, you’ll need a credit score of at least 620 to refinance into an FHA loan.

Apply for an FHA refinance before your refund expires

Current interest rates have slowed the demand for refinance loans.

Meanwhile, home values have continued to rise in many markets, creating more equity for more homeowners.

If you’re thinking about getting an FHA refinance, you may be able to save money through an FHA MIP refund.

See if you're eligible for a FHA refinance loan (Sep 16th, 2024)

The post FHA MIP Refund Chart & Guide | 2024 Mortgage Insurance Premiums first appeared on My Mortgage Insider.

What is an FHA cash-out refinance?

There are two primary FHA refinance loan programs: the FHA cash-out refinance and the streamline refinance. The FHA cash-out loan provides cash-in-hand for the borrower. You open a loan with a bigger balance than what you currently owe, and the excess proceeds go to you.

Because it’s a riskier product for lenders, the FHA cash-out refinance loan requires more documentation than does the FHA streamline refinance. An FHA streamline refinance loan allows you to refinance to a lower rate with little documentation, but it doesn’t allow any cash to the borrower.

Check today's FHA cash out rates here (Sep 16th, 2024)

In this article:

• Benefits of a FHA cash-out refinance
• Credit score and LTV requirements
• Conventional cash-out vs. FHA cash-out
• FHA cash-out refinance guidelines
• FHA cash-out refinance requirements
• FHA cash-out refinance FAQ
• Our recommended refinance lenders

Benefits of an FHA cash-out refinance

As the name implies, the greatest benefit of an FHA cash-out refinance is to put extra cash in the borrower’s pocket. These funds can be used for any purpose such as:

• Home improvement expenses
• Education costs
• Buying a new car or paying off a car loan
• Consolidating credit card balances
• Creating cash for savings or investment

For example, if you owe $100,000 on your home you could open an FHA cash-out loan for $150,000, assuming your home has adequate equity and you qualify for the loan. If closing costs were $5,000, you could end up with an extra $45,000 in your pocket.

These loans may also be used to simultaneously lower the interest rate and/or change the loan term (30-year fixed to a 15-year fixed). Loans may even change from an adjustable-rate mortgage (ARM) to a steady fixed-rate loan.

Click here for today's FHA cash out rates (Sep 16th, 2024)

FHA cash-out refinance credit scores & LTV

Compared to conventional cash-out loans, FHA cash-out loans have relaxed guidelines that allow borrowers with lower credit scores and higher debt-to-income ratios to qualify.

The minimum credit score for FHA loans is 500, assuming a 10% down payment. FHA cash-out refinances require 15% equity (the same as a 15% down payment). So, in theory, you need a 500 credit score to qualify.

However, most lenders require a much higher credit score since cash-out financing is riskier than even a home purchase. You’ll probably need a minimum score between 600 and 660 to qualify for FHA cash out.

FHA cash-out maximum loan-to-value (LTV) is 80 percent of the home’s current value (a new appraisal is required) compared to the maximum conventional cash-out LTV of 80 percent. The higher limit is why many homeowners choose an FHA refinance instead of a conventional one.

For example:

• Current home value: $250,000
• Existing loan balance: $187,500
• Maximum conventional cash-out loan: $200,000
• Maximum FHA cash-out loan: $200,000

After paying off the existing loan plus closing costs, homeowners would receive about $10,000 cash for a conventional cash-out versus $21,000 for an FHA cash-out. That extra $11,000 may be enough for many homeowners to choose the FHA cash-out option.

Conventional cash-out refinance vs. FHA cash-out refinance

FHA cash-out loans also have their disadvantages.

All FHA loans require both an upfront mortgage insurance premium and a monthly insurance premium. The upfront mortgage insurance premium is 1.75% of the loan amount. For a $200,000 loan, that’s $3,500 in additional principal added to your loan amount.

Additionally, FHA requires monthly mortgage insurance which would be 0.80% of the loan amount per year on a loan with an 85 percent loan-to-value ratio. That’s $67 per month for every $100,000 borrowed.

Because of these extra costs, you should consider a conventional cash-out refinance if your home has significant equity. Conventional loans at or below 80 percent loan-to-value do not require upfront or monthly mortgage insurance.

Check your FHA eligibility (Sep 16th, 2024)

FHA cash-out refinance guidelines 2024

Income

The FHA cash-out refinance requires sufficient income to qualify for the new loan. Borrowers must verify their income with at least two most recent paycheck stubs from their employer showing current and year-to-date earnings, W-2 forms from the last two years, and in many instances, the two most recently filed federal income tax returns.

Assets

Asset verification in the form of bank and investment statements are typically not a requirement for an FHA cash-out refinance loan as no funds are needed in order to close the transaction. However, this does not mean the FHA lender cannot request bank statements as part of their internal underwriting guidelines.

Appraisal

The FHA lender evaluating an FHA cash-out loan application will require an appraisal report on the subject property. The value on the appraisal is used to determine the maximum allowable loan amount for an FHA cash-out loan. Currently, the maximum loan amount for an FHA cash-out refinance is 80 percent of the value of the property as long as the home was purchased more than one year ago and does not exceed FHA’s county-by-county loan limits.

Credit

The minimum credit score for all FHA loans is 500. While there is no minimum credit score established by the FHA for cash-out loans specifically, lenders will typically have their own internal requirements that are much higher than the minimum. The minimum credit score requirement for an FHA cash-out refinance is usually between 620 and 680. Check with a lender to see if your FICO score is high enough.

Click here to request a free FHA cash-out rate quote (Sep 16th, 2024)

FHA cash-out refinance requirements 2024

• 600 credit score or higher (varies by lender)
• Must be an owner-occupied property
• Loan-to-value (LTV) ratio must to exceed 80 percent
• No more than one late payment in past 12 months
• Existing mortgage must be at least six months old
• Debt-to-income (DTI) ratio below 41 percent
• Non-occupant co-borrowers may not be added

Occupancy. FHA cash-out refinance loans are for owner-occupied properties only and cannot be used for rental properties.

Payment history. To qualify for an FHA cash out, you may not have more than one mortgage payment that was more than 30 days late in the last 12 months. The existing mortgage must be at least six months old and have a verified payment history, usually determined by the borrower’s credit report.

Length of ownership. If you’ve lived in the home less than a year, the FHA lender will use the lower of the appraised value or the original purchase price of the home to determine your maximum loan amount. For example, if you purchased the home less than a year ago for $250,000 and it now appraises for $270,000, your maximum loan amount will be $200,000 (80 percent of $250,000).

Debt-to-income ratio. FHA cash-out loans require the borrower to meet existing debt-to-income ratio guidelines. The maximum FHA debt ratio guidelines are 29 and 41, but may be higher in certain instances. The first ratio, 29, is the housing ratio calculated by dividing the total housing payment with gross monthly income. The housing payment includes principal and interest, taxes, insurance, monthly mortgage insurance premium and any condo or homeowner association fees. For example, if the housing payment is $2,000 and monthly income is $7,000, the housing debt ratio is 28.5%.

The total debt ratio limit is 41 and includes the housing payment plus additional monthly credit obligations. Additional credit obligations include credit card payments, automobile or student loans, and installment debts. Other qualifying debt includes spousal or child support payments. This number does not include utilities, car insurance, or other non-debt payment types.

A borrower with $7,000 per month income may have a house payment up to $2,030 per month and monthly credit obligations of up to $840 per month.

Co-borrowers. Non-occupant co-borrowers are allowed on an FHA cash-out refinance loan as long as the non-occupant co-borrowers are on the original note. Non-occupant co-borrowers may not be added to the loan application to help the primary borrower qualify.

Click here to see today's FHA cash out refinance rates (Sep 16th, 2024)

FHA cash-out refinance FAQ

How much lower does my new rate have to be in order to qualify for an FHA cash-out loan?

There is no requirement that your new rate be lower by a specific amount, but the lender may require that there be a tangible benefit to you by refinancing. This benefit may be the cash itself, a lower payment, reducing your loan term, or changing from an adjustable rate or hybrid loan into a fixed-rate mortgage.

Is there any way to eliminate the mortgage insurance premium on an FHA loan?

The upfront FHA mortgage insurance is always required and cannot be changed. However, your lender may be able to adjust your interest rate upward and give you a credit from the excess profit from the loan, to help pay the 1.75% upfront mortgage insurance premium.

Can I refinance my conventional mortgage into an FHA cash-out loan?

Yes, you may. However, the FHA cash-out limit is 80 percent of the value of the home and requires a mortgage insurance premium to be paid. Consider the additional closing costs with an FHA cash-out loan and compare the FHA option with a conventional loan.

Check today's FHA cash out rates here (Sep 16th, 2024)

I’m not sure how much cash out I need. How do I determine that?

Your FHA loan will be limited both by the 80 percent loan-to-value ratio as well as your local loan limits established by FHA. With that limitation in mind, figure out how much cash you need for your specific goal. Tell your loan officer that number, and he or she will work backward, figuring in closing costs, to come to a sufficient loan amount (assuming all loan qualification factors make the desired loan amount possible).

If you only want to pull cash out of your property, but want to avoid the extra costs of a full refinance, consider obtaining a home equity loan instead. Many local and national banks are now offering second mortgages, which are a cheaper option than refinancing.

How late can a payment be in the past 12 months and still qualify?

Mortgage payments are typically due on the first of the month and considered past due after the 15^th of the month. Only payments that are more than 30 days past the original due date are considered “late.” Any payments made before 30 days past the due date are not counted against you, as long as your lender received the payment on time and did not report your payment late to the major credit bureaus.

I bought my property four months ago and I think it’s worth a lot more now. Can I refinance?

Properties owned less than six months are not eligible for a FHA cash-out refinance. You must wait at least six months. However, if your property has appreciated significantly in six months, the FHA lender will use the original sales price of the property or a new appraisal, whichever is lower. If you put the minimum 3.5 percent as a down payment six months ago, a lender will question why the property value has increased in such a short period of time.

What is the FACOP Refi initiative?

FACOP is an acronym for Federal Assistance Cash-Out Program, and some have recently begun to use the term interchangeably to describe an FHA cash-out refinance. Users searching for “FACOP refi” should be cautious of online scams offering free money to applications; the only legitimate FHA cash-out refinance is the one backed by the federal government and insured by the FHA.

Ready to apply for an FHA cash-out mortgage?

An FHA cash-out refinance can be a great idea when you’re in need of cash for any purpose. With today’s low rates, this loan type is a very inexpensive way to borrow money to achieve your goals.

Apply for the FHA cash-out refinance here (Sep 16th, 2024)

The post FHA Cash-out Refinance 2024 | Tap Into Your Home Equity first appeared on My Mortgage Insider.

With this refinance option, homeowners can get approved with no home appraisal and no credit check. This speeds up the approval process and lowers closing costs.

But these loans still require refinance closing costs, and paying them can be a big hurdle for homeowners.

Check your FHA streamline refinance eligibility. Start here (Sep 16th, 2024)

FHA doesn’t allow closing costs to be added to a new refinance loan

Many mortgage loans — like a conventional refinance — allow borrowers to finance closing costs into the new mortgage refinance loan to reduce out-of-pocket expenses.

Because the FHA Streamline Refi requires no home appraisal, the rules for loans backed by the Federal Housing Administration are a little different. Instead of basing the loan’s size on the loan-to-value ratio, the FHA streamline refinance bases its loan size on the home’s current FHA loan size.

Specifically, the lender subtracts the FHA MIP refund from the current unpaid principal balance, then adds on the new upfront MIP costs.

(Current unpaid principal balance) – (FHA MIP refund) + (New upfront MIP cost) = New maximum loan amount

FHA streamline refinance maximum loan calculation

For example, assuming a current FHA loan closed 12 months ago with a current loan balance of $150,000, the new loan amount would be as follows:

• Current balance: $150,000
• Upfront MIP refund due to borrower: $1,522
• New upfront MIP due: $2,625
• Max new loan amount: $151,103

The new maximum loan amount does not leave room for financing in closing costs. For an FHA Streamline Refinance, typical closing costs range between $1,500 and $4,000. Though, closing costs can vary widely depending on the lender, borrower characteristics, and the loan amount.

The good news is that you don’t always have to pay these closing costs out of pocket.

Lender-paid closing costs on an FHA Streamline Refinance

Streamline loans are in high demand with lenders — overall, they take less time and fewer resources to process compared to other loan types. Lenders also don’t have to order a home appraisal. This minimizes the risk of wasted time and energy if the home’s value does not appraise for the expected amount.

Lenders also don’t have to do income verification for the new loan. They don’t have to calculate your debt-to-income ratio. If you’ve been paying your monthly mortgage payment, lenders assume you’ll continue to do so when you have a lower monthly payment.

These factors add up to lenders wanting a lot of FHA Streamline Refinance business, and that’s good news for consumers. By getting multiple quotes from multiple lenders, banks and mortgage companies have to compete. This gives FHA Streamline Refinance applicants the leverage to reduce their out-of-pocket expenses.

For example, an FHA applicant gets two FHA streamline quotes at 7%. One lender quotes $3,000 due at closing; the other lender quotes $2,000. The borrower can, and should, negotiate using lower closing costs with the higher-priced lender.

By trying this method, many borrowers can drastically reduce or even eliminate their out-of-pocket costs without increasing their interest rate by rolling closing costs into the loan.

Check your FHA streamline refinance eligibility. Start here (Sep 16th, 2024)

Service release premiums give lenders the power to negotiate

Ever wonder how lenders are able to waive thousands of dollars in fees?

Lenders enjoy what’s called a service release premium (SRP). It’s a fee not disclosed on the Loan Estimate or other loan documents. Lenders collect the SRP when they sell a closed loan to a loan aggregator like Fannie Mae or Freddie Mac.

For FHA lenders, the aggregator is Government National Mortgage Association, or GNMA, which is owned by the U.S. government. (GNMA pools together loans and sells them off as securities to investors, who enjoy collecting the interest the borrower pays over the life of the loan.)

The SRPs that the lenders collect from these aggregators can add up to thousands of dollars. This money could be applied to pay for all or part of the borrower’s closing costs. The closing costs still exist, but the borrower isn’t required to pay them or is reimbursed any cost paid upfront.

FHA Streamline Refinance applicants have the power to lower their FHA closing costs by negotiating with the lender to pay them. It never hurts to ask.

FHA Streamline Refinance Closing Costs

Most homebuyers and refinancers know how to compare interest rates between different lenders, but many loan shoppers don’t think as much about closing costs and fees.

Closing costs can vary a lot by lender, too. Some charges are set in stone, but others aren’t. For example, loan origination fees can vary from 0% to 1% of the loan amount. If you’re refinancing a $200,000 loan, 1% would add $2,000 in closing costs; 0.5% would add only $1,000.

What’s the easiest way to compare closing fees? Get Loan Estimates from at least two lenders. All FHA lenders’ Loan Estimates should appear on a standardized form, making these charges easy to compare.

Are there closing costs with an FHA Streamline Refinance?

FHA Streamline Refinance loans are faster, easier — and less expensive — than most refinance loans. But they still require closing costs.

Any type of refinance will incur closing fees. Even when the lender advertises no closing costs, the costs still exist, and most often, they’re still being paid by the borrower in the long run — unless you negotiate, specifically, for your FHA lender to lower its fees.

Even when you pay closing costs, the benefits can still outweigh the costs if your new loan saves money every month.

Typical closing costs with an FHA Streamline Refinance

In addition to the fees listed below, qualifying borrowers are also required to prepay some expenses like taxes and homeowners insurance. The borrower’s current lender typically sends a refund of a similar amount when the loan closes. This means the net cost for borrowers is often close to zero for prepaid items.

*This is a list of possible fees for an FHA streamline refinance. While not an all-inclusive list, it should give you an idea of general closing costs.

Your loan could require higher or lower fees depending on the lender, the loan amount, and your credit score among other loan factors. The only way to get an accurate estimate is to get a Loan Estimate from a lender to see their quoted costs. Once you get this estimate from at least two lenders, then you can start to negotiate your fees.
While these costs may seem large, keep in mind the amount of money the lender collects in SRP at closing — this gives the borrower the power to negotiate.

Check your FHA streamline refinance rates. Start here (Sep 16th, 2024)

Can you refinance from an FHA loan to a conventional loan?

If you have an FHA loan, it’s possible to refinance to a conventional loan once you have 5% equity in your home.
If you meet the home equity eligibility requirements, refinancing to a conventional loan can give you the benefit of lower interest rates and allow you to get rid of your private mortgage insurance (if you have at least 20% equity in your home).

But just because it’s possible to refinance from an FHA loan to a conventional loan, it might not make financial sense for your situation. You’ll need to consider the net tangible benefit for your personal finances. Plus, this will require you to provide asset verification and you will probably need to pay for a new home appraisal.

Meanwhile, an FHA Streamline Refinance can help you quickly drop the monthly payment on your existing FHA loan and without so much documentation or an appraisal.

Who can use an FHA Streamline Refinance?

The FHA Streamline Refinance program works only for current FHA loan holders. And, it won’t work for every FHA homeowner.

To use this refinance option, a homeowner must be able to benefit from it. Benefits include getting a lower monthly mortgage payment or changing from an adjustable-rate mortgage to a fixed-rate mortgage.

And, of course, the homeowner must be living in the home as a primary residence. The Department of Housing and Urban Development (HUD) requires this of all FHA borrowers.

Two types of FHA Streamline Refinance loans

The FHA offers two different types of Streamline Refinance loans:

• Non-credit Qualifying Streamline Refinance: Lenders won’t have to check your credit score or income. Your payment history will show whether you’re qualified. Avoid late payments in the year leading up to your refinance
• Credit Qualifying Streamline Refinance: With this option, the lender will check your personal finances to make sure you’re approved to borrow. This will be necessary to add a new co-borrower or remove a co-borrower from your loan

Closing costs will likely be a little higher for a credit-qualifying loan since it requires a credit check and more thorough underwriting.

FHA Streamline Refinance Closing Costs FAQs

What is the FHA Streamline program?

An FHA Streamline Refinance loan replaces an existing FHA loan with a new FHA loan. The new loan saves the borrower money, usually by replacing a higher interest rate loan with a lower rate loan. Streamline Refis can also lower monthly payments by extending the loan term, though the FHA won’t allow adding more than 12 years to the term.

Are there closing costs with an FHA Streamline Refinance?

Yes, lenders still charge loan origination fees and other lender’s fees. Borrowers also pay third party fees like title insurance and attorney’s fees. Most borrowers will need to pay prorated property taxes or insurance premiums.

How much does it cost to do an FHA Streamline Refinance?

Costs vary by lender, loan, and borrower. Expect to pay $1,500 to $4,000 for the typical Streamline Refi.

Does an FHA Streamline Refinance get rid of PMI?

No. FHA loans don’t charge private mortgage insurance (PMI). Instead, they require the FHA’s Mortgage Insurance Premium (or MIP). Unless they make a down payment of 10% or more, FHA homebuyers pay MIP for the life of the loan. MIP is required on an FHA Streamline Refinance.

What are the cons of an FHA Streamline Refinance?

Unless your current mortgage is an FHA loan, you can’t use an FHA Streamline Refinance. That’s a con. Also, this loan won’t allow cash back at closing. You’d need a cash-out refinance for that.

Is FHA Streamline Refinance a good idea?

It’s a great idea to get a Streamline Refi if the new loan saves you money every month — and if you’ll keep the home long enough for the savings to pay off. If you plan to sell the home in a year, it’s probably not a good idea to refinance now.

Can I roll closing costs into an FHA refinance?

No. An FHA Streamline replaces your current loan with a new loan that’s the same size. There’s no room to finance closing costs and there’s no room to cash out home equity. To do that, you’d need an FHA cash-out refinance.

Who qualifies for an FHA Streamline Refinance?

Existing FHA homeowners who can save money by getting a new loan can qualify for an FHA Streamline Refinance. FHA homeowners can also qualify if they need to remove or add a co-borrower or replace an adjustable-rate loan with a fixed-rate loan. To be eligible for refinancing, an existing FHA loan must be old enough for the borrower to have made at least six monthly payments.

How long does an FHA Streamline Refinance take?

FHA Streamline Refinances are quicker and easier than most other refinance types. You could close within a few weeks if everything goes as planned. However, closing times vary by lender and borrower. Some could take as long as 45 to 50 days.

FHA streamline loan borrowers aren’t hindered by closing costs

Even though the FHA Streamline Refinancing program doesn’t allow closing costs to be rolled into the new loan amount, borrowers don’t have to pay those fees out of pocket — the high demand for FHA loans gives mortgage lenders (and borrowers) more leeway to negotiate a lower rate and fee structure.

If your FHA loan’s mortgage rate is higher than the rate you could get today, there’s no reason to be paying more for your home loan than necessary — and that includes closing costs to refinance.

Check your FHA streamline refinance eligibility. Start here (Sep 16th, 2024)

The post FHA Streamline Refinance: Negotiate Zero Out-of-Pocket Closing Costs first appeared on My Mortgage Insider.

Nothing could be further from the truth.

The fact is that there have always been and always will be mortgage options for borrowers that don’t have a large down payment.  Here are five loan options for those who have 5 percent or less for a down payment.

Check your eligibility to buy a house with less than 5% down. Start here (Sep 16th, 2024)

#1: Conventional loans with PMI

Conventional loans are mortgages approved using guidelines established by mortgage giants Fannie Mae and Freddie Mac. Historically, lenders required a down payment of 20 percent. Yet in 1957, private mortgage insurance, or PMI, was introduced.

Mortgage insurance is an insurance policy that repays the lender should the borrower default. The borrower pays for this insurance policy along with their monthly mortgage payment. This extra expense can be well worth it though.

Say a home is sold for $200,000. A 20% down payment is $40,000. That’s quite a lot for new home buyers. A 5 percent down is much more feasibly, at only $10,000. A PMI policy can be purchased at a cost of approximately $150 to $300 per month, depending on credit score. But this option helps bring down the barriers to homeownership significantly.

Check your home buying eligibility. Start here (Sep 16th, 2024)

#2: Federal Housing Administration (FHA) loans

In recent years, FHA has been the standard for first-time home buyers. Although that’s shifting because of increased offerings in conventional lending, they are still very popular.

FHA loans require as little as 3.5% down, a bit less than the conventional requirement. That means on a $200,000 loan, the minimum down payment is just $7,000.

An FHA loan has a monthly mortgage insurance requirement like a conventional loan, but it also has an “upfront mortgage insurance premium,” or MIP. The MIP is 1.75% of the loan amount, or in this example an additional $3,500. However, this upfront premium does not have to be paid out of pocket and can be rolled into the loan amount.

The monthly mortgage insurance premium for an FHA loan is typically 1.35% of the loan amount per year, divided into 12 equal installments and added to the monthly payment. For example, a $200,000 total loan amount would require $225 per month in mortgage insurance.

Although an FHA loan is more expensive than its conventional counterpart, it allows for a lower credit score and offers more lenient income requirements, making it the best program for some home buyers.

Check your eligibility for an FHA loan. Start here (Sep 16th, 2024)

#3: VA loans

This program is a special entitlement offered to active duty personnel and veterans of the U.S. armed forces. The VA loan requires no down payment whatsoever. In addition, there is no monthly mortgage insurance premium, just an upfront premium, usually 2.3% of the loan amount.

The minimal costs associated with this loan make it the clear choice for current and former members of the military.

Those who have served in one of the branches of the military including the National Guard or Reserves could be eligible.

For complete guidelines, see our VA home loan page or contact a VA-approved lender.

Check your VA home loan eligibility. Start here (Sep 16th, 2024)

#4: USDA loans

Sometimes referred to as the Rural Development Loan, the USDA program requires no down payment.  As the name implies, the program is designed to assist borrowers buy and finance a property in rural, less urban areas.

In order to qualify for a USDA loan, the property must first be located in an eligible area. These areas are mapped on the USDA website. This is the first place borrowers should visit to see if a prospective home is eligible. By entering the address on the website, the property’s eligibility will be determined.

Eligible areas are often rural in nature, but surprisingly, many eligible areas are suburbs of bigger metropolitan areas. Even if you don’t think the area in which you’re looking to buy a home is eligible, it’s worth taking a look at the USDA loan map.

You could discover that you’re able to buy a home with zero down payment.

Check your eligibility for a USDA loan. Start here (Sep 16th, 2024)

#5: Fannie Mae HomePath loans

Editor’s note: Fannie Mae ended their HomePath program on October 6, 2014. For more details, visit our Fannie Mae HomePath page.

Fannie Mae has a list of foreclosed properties that it offers for sale on the website HomePath.com. Buyers can look for homes in their area with a simple city or ZIP code search.

Home buyers can purchase these homes with only 5% down. What’s more, buyers receiving a gift from an eligible gift source only need $500 of their own money.

Unlike a standard conventional loan, Fannie Mae HomePath loans don’t require mortgage insurance or an appraisal. Some of the properties may be in need of repair, but they provide a great opportunity, especially for first-time home buyers who have little to put down on a home.

Check your home buying eligibility. Start here (Sep 16th, 2024)

A 5% down payment is all you need

Lenders have realized that it’s unrealistic to require a 20% down payment considering today’s home prices. That’s why many programs are available, even to those with less-than-perfect credit and little money saved.

And current interest rates make it even more affordable to buy a home. Contact a reputable lender to find out which of these programs might work best for you.

Check your eligibility to buy a house with less than 5% down. Start here (Sep 16th, 2024)

The post 5 Ways to Buy a Home with 5% Down or Less first appeared on My Mortgage Insider.

Below, we’ll dive into the requirements for an FHA loan down payment and the types of down payment assistance available for these loans.

Check your eligibility to buy a home with just 3.5% down (Sep 16th, 2024)

What are the benefits of an FHA loan?

FHA loans are government-backed loans offered by the Federal Housing Administration (FHA).

This loan program offers significant benefits for home buyers including:

• Low down payment
• Flexible credit qualifications
• Relatively low mortgage rates

These benefits make it an excellent loan program for first-time home buyers or those with limited cash reserves.

What is the minimum FHA loan down payment?

Your down payment minimum with an FHA loan will depend on your credit score.

Homebuyers with a credit score of 580 or greater can get an FHA loan with just 3.5% down.

Homebuyers with scores between 500-579 may still qualify for an FHA loan but will likely need to make a larger down payment of 10%.

FHA minimums and private lenders

Keep in mind that while the FHA sets the minimum requirements for this loan program, private mortgage lenders can set their own standards, which may be stricter.

If you’re hoping to qualify with a credit score between 500 and 579, for example, it may be harder to find a willing lender — even though FHA technically allows these credit scores with 10% down. So make sure you shop around and explore your options. Some lenders will be more lenient than others.

Click here for today’s FHA mortgage rates (Sep 16th, 2024)

Mortgage insurance requirements for an FHA loan

In addition to the guarantees offered by the FHA, lenders charge mortgage insurance premiums (MIP) to offset the higher risk associated with FHA loans. The borrower pays for this insurance but it’s the FHA lender who gets the payout in the case of mortgage default and foreclosure.

MIP comes in two parts. First, there’s an upfront mortgage insurance premium (UFMIP). UFMIP can be paid at closing but most borrowers roll it into the loan amount to avoid the upfront fee. The cost is usually 1.75% of the loan amount. So this is what a $200,000 home purchase would look like:

• Purchase price: $200,000
• Down payment (3.5%): $7,000
• Loan amount before upfront MIP: $193,000
• Upfront MIP of 1.75%: $3,378
• Total loan amount: $196,378

Secondly, you have to pay a smaller (but still significant) premium each month. Most often, this monthly mortgage insurance is equal to 0.85% of the existing loan balance per year. For that $200,000 home purchase, it will cost about $136 per month, which is added to the monthly mortgage payment.

FHA mortgage insurance premiums (MIP) don’t drop off automatically

Unlike the private mortgage insurance with conventional loans, which drops off after you’ve accrued sufficient home equity, the mortgage insurance premiums on an FHA loan will typically last for the life of the loan.

To get rid of your mortgage insurance payments, you’ll need to refinance to a different loan type — one without mortgage insurance — once your loan-to-value (LTV) is greater than 80%.

The only exception is for FHA borrowers who make a down payment of 10% or more. In this case, your MIP is removed after 11 years.

Down payment gift rules for FHA loans

An added benefit of FHA loans is that they offer less strict rules about down payment gifts than some other types of mortgages, making it that much easier for borrowers to benefit from the help of family or friends.

Some — or even all — of your down payment for your new home can be a gift, as long as:

1. The money is a gift, not a loan in disguise
2. The person giving the money provides a formal gift letter
3. There is a documented paper trail of the money leaving the giver’s account and arriving in yours

The gift can come from a family member, an employer or labor union, a close friend, or a charitable organization. This is a big FHA loan benefit as conventional loans have stricter rules regarding gift funds.

FHA loan down payment assistance programs (DPAs)

There are thousands of down payment assistance programs (DPAs) across the United States. And there’s at least one in every state. Many cities and counties offer their own programs, too.

Every DPA has its own rules. Some give help with closing costs while others don’t. Some help only first-time buyers.

Assuming you qualify, you may be offered a low-interest loan that you pay down in parallel with your main mortgage. You could even be given thousands of dollars in outright grants — meaning you never have to repay a cent.

Low down payment alternatives to FHA loans

There are a number of low down payment loan program alternatives to the FHA loan.

Conventional 97 loan: 3% down

Sometimes known as “Conventional 97” mortgages — because you can borrow up to 97% of the value of the home — these loans require a minimum down payment of just 3%.

That’s lower than the FHA’s 3.5% minimum. So why does anyone opt for an FHA loan?

Well, it’s mostly because of the credit score requirements. Fannie Mae, for instance, insists on a minimum score of 620 for its fixed-rate mortgages (FRMs) and 640 for its adjustable-rate mortgages (ARMs) to qualify for the Conventional 97 program. Some private lenders require even higher scores.

To get the best rates for a Conventional 97, you should have a good credit score above 700.

If you have a good credit score, you might opt for a low-down payment conventional mortgage. This is because you can cancel mortgage insurance when you’ve paid down the loan. FHA requires mortgage insurance for the entirety of the loan term.

Check your home buying eligibility. Start here (Sep 16th, 2024)

HomeReady loan: 3% down

This conventional loan program, intended for moderate-income borrowers, will allow you to buy a home with just 3% down. The HomeReady loan program also has lower private mortgage insurance (PMI) rates compared to a standard conventional loan.

To qualify, you’ll need to earn less than 80% of your area’s median income.

Click here to see if you qualify to buy a home with the HomeReady Mortgage (Sep 16th, 2024)

Home Possible loan: 3% down

Much like a HomeReady loan, this Home Possible loan program can help moderate-income borrowers purchase a home with a down payment of just 3% and reduced PMI premiums.

Check your Home Possible eligibility here (Sep 16th, 2024)

VA loans: 0% down

VA loans are reserved almost exclusively for veterans who meet minimum service levels, and those now serving in the military.

If you’re eligible, your service buys you one of the best mortgages around: zero down payment, low-interest rates, no continuing mortgage insurance, and the option of a VA streamline refinance later.

USDA loans: 0% down

If you want to live in a less densely populated area, you may be eligible for a USDA loan with zero down.

And that’s more likely than you may think: roughly 97% of the American landmass is so designated, including some suburbs.

However, these mortgages are reserved for those with “regular” incomes — up to 115% of the area’s median to be exact. For example, home buyers near Portland, Oregon can make up to $105,950 and still be eligible. There’s a good chance that you’re income-eligible.

You still have to pay some mortgage insurance on a USDA loan, but probably less than you would with an FHA one.

Click here for current USDA rates (Sep 16th, 2024)

FHA loan requirements in 2024

Besides down payment requirements and minimum credit score, what else is needed to qualify for an FHA loan?

FHA loan limits

In most of the US, you can borrow up to $498,257 for a single-family residence with an FHA loan. But that rises to $1,149,825 if you’re buying in an area with high home prices.

The limit may be even higher if you want to purchase a home in Alaska, Hawaii, the US Virgin Islands or Guam — or if you’re buying a residence for multiple families.

To find the loan limits in the place you want to buy, use the look-up tool on the website of the US Department of Housing and Urban Development (HUD).

FHA debt-to-income ratio (DTI)

Alongside your credit score and down payment, the other thing lenders look at closely is your debt-to-income ratio or DTI. That’s the percentage of your pre-tax monthly income that’s taken up by monthly commitments including debt, alimony, and child support. You will also need to add your housing expenses once your new mortgage is in place. Utilities are not taken into account.

FHA guidelines are relatively flexible about your DTI. And it’s possible to get approved with one as high as 50%. However, you’ll likely need to impress in other ways (like a higher credit score or down payment than the minimums) to get that high a ratio approved. More often, FHA lenders prefer a DTI below 45%.

Click here for today’s FHA mortgage rates (Sep 16th, 2024)

FHA loan down payment FAQ

What is an FHA loan?

An FHA loan is a government-backed mortgage loan insured by the Federal Housing Administration (FHA) that requires a minimum down payment of 3.5% and has more flexible credit requirements than many other loan options. FHA loans can be used to buy a home, refinance your existing mortgage, or renovate a home.

What is the minimum down payment for an FHA loan?

For borrowers with a credit score of 580 or above, the minimum down payment for an FHA loan is 3.5%. For borrowers with a credit score between 500 and 579, the minimum down payment is 10%.

Does FHA require 3.5% down?

Yes, the FHA requires a minimum down payment of at least 3.5%.

Can you put more than 3.5% down on an FHA loan?

Yes, you can put down more than 3.5% and it may even lead to a lower mortgage rate. Additionally, depending on your credit score, a 10% down payment may be required.

Can you do no down payment with FHA?

FHA home loans do not offer a “zero down” option, however, there are different kinds of down payment assistance available for FHA borrowers. There are both state and regional programs that offer down payment assistance and which may enable a borrower to obtain an FHA loan without using any of their personal funds for the down payment or closing costs.

Can you use a credit card for an FHA down payment?

No, using a credit card is strictly prohibited by the FHA, as credit cards are considered “non-collateralized loans.”

Can you put 20% down on an FHA loan?

The FHA only requires a minimum down payment of 3.5% (or 10%, for lower credit borrowers). However, you can put down as much as you want above and beyond the down payment minimum, and doing so may get you a lower mortgage rate and lower monthly payments.

What happens if I put 20% down on an FHA loan?

A larger down payment on your FHA loan will likely get you a lower mortgage rate and lower monthly payments. But, unlike conventional loans, you’ll still need to pay mortgage insurance, even if you make a down payment of 20% or more. That’s why a conventional loan is often more affordable if you have a large down payment.

Can a down payment be included in an FHA loan?

No, you cannot finance your down payment into your FHA loan. However, there are down payment assistance programs that may help to cover your down payment and closing costs.

Can I get additional down payment assistance with an FHA loan?

The FHA itself does not offer down payment assistance. However, there are a number of down payment assistance programs and grants that can help FHA borrowers.

Is an FHA loan right for you?

An FHA loan might be the right answer if you’re looking for a low down payment loan program with relatively low interest rates and flexible credit requirements.

FHA loans are particularly helpful for:

1. Those who wish to be homeowners but who would otherwise be excluded from mortgage borrowing
2. People with lower credit scores
3. Those with limited savings, especially if they can access down payment assistance or gifts

Check with a lender to learn whether you qualify for an FHA loan today.

​​ Check your FHA eligibility (Sep 16th, 2024)

The post FHA Loan Down Payments | Requirements 2024 first appeared on My Mortgage Insider.

If your family will be helping, your lender will need to know in advance. The lender will need a “gift letter” from the donor to make sure your down payment help has no strings attached.

If you’re planning to buy a house but need help with the down payment, you could ask for down payment gift money.

Check your eligibility to use gift funds to buy a home. Start here (Sep 16th, 2024)

In this article:

• Gift funds can help first-time homebuyers get a home
• Using conventional loan gift funds
• FHA loan gift funds
• USDA loan and VA loan gift funds
• Who can give gifts?
• What gifts are unacceptable?
• Sample mortgage gift letter (pdf)
• Gift money documentation
• Alternatives to down payment gift funds
• What is a gift of equity?
• Qualifying for a loan
• Down payment gift funds FAQs
• Our recommended lenders for home loans

Gift funds can help first-time homebuyers get a home

It takes a lot of cash to make a down payment, even with today’s smaller down payment mortgages.

For example, let’s say you’re buying a $350,000 home, which is less than the current median home purchase price in the U.S. That translates into a dollar amount of:

• $10,500 to make a 3% minimum down payment on a conventional loan
• $12,250 to make an FHA loan’s 3.5% down payment
• $17,500 for a 5% down conventional loan

A down payment gift could help you reach this threshold sooner, and buying sooner often means paying less. As years pass, homes tend to get more expensive.

And, don’t forget about the closing costs which could double your upfront cash outlay. Gifted money can help with those costs, too.

How do down payment gifts work?

Down payment gifts seem simple enough: Family members — or friends, in some rare cases — give you money, and you use the money for your down payment, closing costs, or both.

But there are some rules to know about. Following your lender and loan program’s rules will help avoid delays in closing your loan.

Overall, the rules ensure you’re not required to repay the gifted funds. For example, does the donor expect to own part of your home in exchange for the gift? Will the owner want a lien on the property?

The best way to clear up these questions is with a down payment gift letter.

What is a down payment gift letter?

A gift letter, from the donor to the lender, includes the donor’s name, address, and phone number. It also includes the donor’s relationship to the borrower and the amount of the gift.

The letter should state that the gift is intended to help the borrower make a down payment and that the donor has no expectation of repayment.

If your donor isn’t sure how to write a gift letter, that’s OK. The loan officer usually provides a template gift letter for the borrower to provide to the donor. The donor then completes and signs the letter.

Or, you can download an Editable Gift Letter or view a PDF Gift Letter.

Is gift money taxed?

You won’t have to report a down payment gift as income on your tax return. The money won’t be taxed as income.

It’s not quite as simple for donors. The IRS allows each donor to give you up to $17,000, beginning in the 2023 tax year, without paying a gift tax. (In 2022, the maximum was $16,000.) Married couples can give $34,000 ($32,000 in 2022).

Also, donors have a lifetime cap on gift-tax-free donations. Beginning in 2023, that lifetime cap is $12.92 million.

Are there limits on gift amounts?

As long as you and your donor meet your lender’s guidelines, you could use gifted money to cover your entire down payment amount on a primary residence.

In the past, conventional loan gift funds were limited to a certain percentage of the purchase price. But now this happens with some investment property loans.

That said, each loan type does have its own unique requirements, so we’ll discuss those next.

Using conventional loan gift funds

Conventional loans, regulated by Fannie Mae and Freddie Mac, allow the borrower to apply financial gifts to the down payment, fees, and closing costs.

Borrowers usually do not need their own funds when receiving a gift if the gift covers the entire down payment and other loan costs. (In the past, borrowers needed 5% of their own funds.)

Now, according to Fannie Mae, the minimum 5% borrower contribution is only needed when:

• The gift amount is less than 20% of the purchase price, and the property is 2- or 4-unit or a second home
• If the loan amount is over $647,200

How much money can be gifted on a conventional loan?

To clarify, borrowers don’t need to bring their own funds when receiving a gift that covers the entire down payment and closing costs — unless the final loan amount is higher than the annual conforming loan limit. The current loan limit in most counties is $766,550 in 2024.

If the gift amount does not cover all upfront costs, borrowers need to prove they have the money to cover them, or they’ll need to receive a higher gift amount.

You may think it’s unlikely for someone to give away enough money to cover the entire down payment and closing costs. But, it happens more than you might think. Gifted money has allowed many homebuyers to achieve homeownership much earlier than they would have on their own.

Who can give gift funds on a conventional loan?

Not just anybody can help you make the down payment on your home. Gifts from the following sources are acceptable:

• Spouses, fiances, or domestic partners
• Children or other dependents
• Other relatives by blood, marriage, adoption, or legal guardianship

Interested parties, such as real estate agents or the home’s seller, cannot donate to the cause.

However, the home’s seller could help, indirectly, through seller concessions, up to 3% of the purchase price if you’re putting less than 10% down.

Technically, seller concessions can go only toward your closing costs. But, in reality, getting help with closing costs could free up more of your own money for your down payment.

What documentation is required when a gift is being used on a conventional loan?

Lenders will need to track the source of your down payment funds. Along with asking for a gift letter, expect your loan officer to check one or more of the following:

• Your bank statements before and after the gift is deposited
• Your donor’s bank statements before and after the gift is deposited
• Deposit slips showing when you deposited the donor’s check
• Withdrawal slip showing the money leaving the donor’s account
• A copy of the deposited donation check
• Proof of a wire transfer between banks

It’s okay if you don’t have access to all of these documents. Obviously, if you received funds via wire transfer you won’t have a check to show.

Basically, the lender needs to trace the money from the donor’s bank account to your bank account. Keep in mind, the amount of the transfer must match what’s stated in the gift letter.

FHA loan gift funds

The typical FHA borrower makes a 3.5% down payment on a home. This means that if the purchase price is $300,000, the borrower needs to come up with $10,500. The FHA calls this down payment the borrower’s required “minimum investment.”

The minimum investment is the FHA’s way of making sure the homebuyer has “skin in the game” which lowers the risk of foreclosure.

But there’s one exception to the minimum investment rule: The minimum investment can come from a cash gift. Borrowers do not need to contribute any of their own funds if receiving a gift for the full 3.5% down payment.

USDA and VA loan gift funds

Using gifts on USDA and VA loans is less common because these loans do not require a down payment.

However, borrowers may still need help buying a new home with these loans, and gifted money can provide that help. For instance, if the new home’s appraised value is lower than the purchase price, the buyer will need cash to make up the difference. (Lenders won’t underwrite more than the appraised value of the home.)

Also, USDA loan and VA loan borrowers can use gifted money for closing costs.

U.S. Department of Agriculture Rural Development (USDA Guaranteed loans) allow gift funds to cover any down payment required or closing costs not already covered by the seller.

Likewise, The Veterans Administration (VA) allows gifts. For both of these programs, follow the same donor guidelines and documentation procedures as for conventional loans.

Check your mortgage rates. Start here (Sep 16th, 2024)

Who can give down payment gifts?

Typically, donors of financial gifts toward purchasing a house need to be relatives.

According to Fannie Mae’s underwriting guide, the gift giver can be “a relative, defined as the borrower’s spouse, child, or another dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship.”

In addition, a fiancé or domestic partner can be the source of funds.

FHA expands the rules a bit, allowing an employer, labor union, charitable organization or government agency to contribute. There’s even a provision for a close friend to give a gift, provided a documented, long-term relationship was in existence prior to the real estate transaction.

An example would be a high school yearbook, a family photo album, or proof of being roommates in college. This is the kind of real-life documentation the underwriter might ask for when receiving gifted funds from a friend.

What gifts are unacceptable?

Whether you qualify for FHA or conventional financing, lenders ultimately want to know one thing: Is the money from a legitimate gift?

Lenders worry about illegitimate gifts because they could put the loan itself in jeopardy. The point of mortgage underwriting is to make sure you’re willing and able to make the new home’s mortgage payments.

If a down payment gift were really a loan, repaying the loan could make it more difficult to pay the actual mortgage payments.

Gifts can’t come from anyone who would benefit from the sale of the home – the seller, agents, loan officer, etc. – even if any of those individuals are related to the buyer.

Any sums of money received from anyone involved in the transaction are subject to the limits of “interested party contributions” as designated by the loan program. These funds could not be used for the down payment but only for closing costs.

For instance, FHA allows a maximum of 6% of the sales price in interested party contributions. These funds can only be applied to closing costs. Conventional financing allows:

• 3% contribution with a down payment of less than 10%.
• 6% contribution with a down payment between 10% – 25%
• 9% interested contribution for closing costs for down payments over 25%

Again, these funds can only be applied to closing costs, not the down payment.

Documenting the source of gifted mortgage funds

Another piece of documentation is the source of the funds. “Sourcing” funds, as it’s called within the mortgage industry, means showing proof of where the money came from. When dealing with gift funds, “sourcing” gift funds means providing a bank statement showing that the donor does in fact have enough money to give.

This is where things can get a bit sticky. Often, the mortgage lender requires the donor to hand over a full copy of his or her bank statements, showing all transactions and personal information.

Many donors don’t exactly enjoy handing over personal information for a loan that’s not even theirs. Anyone receiving a gift should let the donor know upfront about this requirement.

Check your eligibility to use gift funds to buy a home. Start here (Sep 16th, 2024)

More about gift money documentation

Next, a “paper trail” needs to be established. A paper trail is a set of documents that follow the money. The paper trail would include:

• A bank statement showing the gift money came out of the donor’s account
• A withdrawal receipt from the donor
• A deposit receipt from the receiver
• A statement from the receiver’s bank showing the money is now credited to his or her account

Then the receiver will have to show proof of the gift money coming out and a receipt from escrow showing the funds were received.

Some steps can be cut out if the donor wires the gift money directly to the escrow company handling the transaction. In that case, all that would be needed is the donor’s bank statement and a receipt from escrow.

Likewise, if gift funds were received a long time ago, documenting it may not be necessary. The mortgage lender considers the funds yours if you can show bank statements that do not show the initial deposit.

The gift money would then be considered “seasoned,” which means they have been in your possession long enough to be considered yours.

Alternatives to down payment gift funds

Not everyone has relatives who can donate tens of thousands of dollars for a down payment. That’s fine. You can still find help through down payment assistance programs.

Down payment assistance programs often help first-time home buyers through grants or loans. Many of the loans are forgivable if you stay in the home long enough.

There’s no single source for down payment assistance. Instead, programs are local. Check with your city or county government or Google “down payment assistance” to find local programs. Some of these programs have income limits; others require first-time buyers to complete a homeowners education course.

As with down payment gifts, tell your lender and real estate agent as soon as possible if you’ll be using down payment assistance.

What is a gift of equity?

Conventional loans allow for a gift type called a “gift of equity.” This could help if you’re buying a home from a family member. Basically, the seller charges you less than the home’s appraised value. The difference between the home’s value and what you pay serves as a gifted down payment.

For this to work, the current owner must still be an eligible donor, per conventional loan gift guidelines, and must own and have equity in a piece of property.

Here’s an example: Your parents own a second home worth $300,000 but have agreed to sell it to you for $240,000. The $60,000 price difference becomes your 20% down payment.

The paperwork would still show a home purchase price of $300,000, even though you’d borrow only $240,000.

As far as the paper trail, the lender will accept the final settlement statement, also called the final HUD-1. The final HUD-1 statement is provided by the escrow company and displays each fee that’s related to the property sale transaction.

The HUD-1 will show the gift by showing an item stating “Gift of Equity – $60,000,” or something to that effect. This is proof that the intangible equity has been transferred from the seller to the buyer.

The gift of equity may appear to fall within the definition of an interested party contribution since it’s the seller who is giving the gift. However, Fannie Mae and Freddie Mac make this situation exempt from interested party contribution rules when the buyer and seller have an eligible relationship.

Click here to check your home buying eligibility. Start here (Sep 16th, 2024)

Gifted money helps, but you still have to qualify

Receiving gifts can push you over one of the biggest home buying hurdles, but the down payment is only one piece of the puzzle.
You’ll also need to meet your lender’s:

• Credit score requirement: For conventional loans, the minimum is often 620. FHA lenders can go as low as 580 with a 3.5% down payment
• DTI limits: This stands for debt-to-income ratio. DTI compares your monthly income to your mortgage payment and other debts. Conventional lenders look for DTIs in the 36% to 43% range; FHA lenders can go higher, possibly up to 50% in some cases
• Income documentation rules: Lenders will want to see pay stubs, W2 forms, bank accounts, or tax returns. This proves you earn a steady and reliable income

The good news is that down payment gifts can help you overcome other qualifying challenges. For example, if your DTI is pushing your lender’s limits, a bigger down payment can lower your mortgage payment which, in turn, lowers your DTI.

Before you apply for a loan, use a mortgage calculator to see loan payments for different loan sizes and down payment amounts.

Mortgage loan gift funds FAQs

What are gift funds?

When family members donate money toward your down payment or closing costs, lenders call this money “gift funds” or “gifted funds.” Most types of loans allow gift funds now.

Are gift funds for a mortgage taxable?

For the home buyer, gift funds are not taxable. For the donor, gifts are subject to the IRS’s gift tax if the gift exceeds $17,000 in the 2023 tax year.

Who can give gift funds on a conventional loan?

Family members can contribute toward your down payment. This includes grandparents, parents, children, spouses, domestic partners, fiances, blood-related aunts, and uncles.

Are gift funds allowed on conventional loans?

Yes. In fact, if you’re buying a single-family home to use as a primary residence, gift funds can cover all of your down payment and closing costs.

Can a friend give gift funds for an FHA mortgage?

In some cases, friends can give gift funds for an FHA loan down payment. The lender will need proof that you have a long-term friendship with the donor. A high school or college yearbook could provide this proof.

Can you use gift funds toward a second home?

Yes. But if you’re putting less than 20% down on the second home, you’ll need to provide at least 5% of the down payment yourself.

Can gift funds be repaid?

For a loan originator to accept gifted funds, the donor has to give the money with no strings attached. There can be no expectation of repayment.

What happens if you pay back a down payment gift?

If your gifted money is actually a loan in disguise, you’d be committing mortgage fraud. It’s fraud because you would have misled the lender for the purposes of qualifying for the loan. However, if you wanted to return the gift later after you’d paid off or refinanced the mortgage, that would be between you and the donor.

Receiving gift funds is well worth the effort

Documenting down payment gifts can be complicated, but the process can be well worth it. For many first-time home buyers, gifts can mean the difference between buying a home now or buying a home years from now.

Receiving a gift reduces the amount of savings needed to close the purchase, and gifts also lower the payment on the future mortgage loan.

With a little education and a willing donor, receiving a gift to be applied toward the down payment on a house can turn out to be a sweet deal for a first-time home buyer.

Check your eligibility to use gift funds to buy a home. Start here (Sep 16th, 2024)

The post Down Payment Gift Money for First-Time & Repeat Home Buyers first appeared on My Mortgage Insider.

What is an FHA home improvement loan?

An FHA home improvement loan is an all-in-one purchase and renovation loan insured by the U.S. government. This insurance allows private lenders who are FHA-approved to loan money to buyers who need funds to repair their homes — even without great credit or lots of cash.

Types of FHA home improvement loans

There are two main types of FHA home improvement loans. The best loan option for you will depend on your property, the loan amount, and the type of improvements.

Borrowers looking to purchase a fixer-upper will likely want to use an FHA 203k loan, while borrowers looking to build a swimming pool or make energy efficiency upgrades may opt for other types of home improvement loans.

• FHA 203k loans (for purchase or refinancing) – FHA 203k loans are used for financing the purchase and repairs of primary residences. This loan can be used to purchase or refinance properties that need renovations including single-family or manufactured homes, condominiums, multi-family homes, or mixed-use properties. A Limited 203k loan can be used for less expensive repairs that are not structural, while a Standard 203k loan is for more extensive renovations.
• Title 1 – Available for applicants who typically have a lower or moderate income and do not qualify for a home equity line of credit (HELOC) or home equity loan to obtain the funds for home repairs that are necessary for improving livability.

How do FHA home improvement loans work?

FHA home improvement loans are government-backed loans that enable buyers to affordably improve a home, either a new home they are purchasing or a home they already own.

The big benefit of an FHA 203k loan is that it rolls your purchase and renovation costs into a single low-rate mortgage. That means you only have one loan application, one set of closing costs, and one monthly mortgage payment to worry about.

Without an all-in-one renovation loan, some homeowners would need two separate loans: one mortgage to purchase or refinance their property and a separate loan for home improvements. This can be more costly and time-intensive than combined options like the FHA renovation loan.

The process for FHA home improvement loans is a little more complex than standard FHA loans. That’s because you’ll need to have detailed repair plans and cost estimates that the lender can review before it will approve you for the loan.

Step-by-step guide to getting an FHA home improvement loan

1. Find a home that needs some repair and qualifies for an FHA loan
2. Locate an FHA-approved lender and apply
3. Get bids from qualified contractors
4. Appraisal, paperwork, and underwriting are done by lender
5. Paperwork is reviewed and accepted, loan gets approved
6. Funds for repairs are deposited into a separate escrow account
7. Renovations are completed by contractors
8. Homeowner officially moves into their newly repaired home

Check your FHA mortgage rates. Start here (Sep 16th, 2024)

FHA home improvement loan limits and requirements 2024

Applicants for the FHA loan programs will need to meet the following requirements in order to complete their home purchase and/or renovations:

Limited 203K FHA loan

• Loan amounts: Can be up to $35,000
• Types of repairs: Repairs and renovations that improve the liveability of the home, as long as they aren’t structural
• Habitability: Property must be habitable during renovation
• Timeline: Sixty days to move in
• Payments: Half (50%) upfront and other 50% after project completion
• Other Conditions: Loans can be either fixed or adjustable-rate mortgages. No reserves needed or U.S. Department of Housing and Urban Development (HUD) consultant required. Inspection of repairs not needed if the repair is under $15,000.

Standard 203K FHA loan

• Loan amounts: $5,000 (minimum) with 110% of after-repair value for maximum loan
• Types of repairs: Any repairs (including structural) with emphasis on health and safety
• Habitability: During renovations, the property does not have to be habitable, mortgage payments can financed up to six months in order to live off-site
• Timeline: Six months to move in
• Payments: Processed by HUD consultant
• Other Conditions: Loans can be either fixed or adjustable-rate mortgages. Reserves and HUD consultant required. Home inspection and additional fees are also generally required.

Title 1 FHA loan

• Maximum loan amount: $7,500 (minimum – no collateral), $25,000 (maximum for one unit such as a single-family home) and usually requires the property to be collateral
• Types of repairs: repairs that are necessary for improved livability, not cosmetic
• Occupancy: Must be an occupant of the home for 90 days prior to loan application
• Payments: Loan term can range from six months to 20 years
• Other Conditions: Loans must be fixed-rate only. No appraisal or housing counseling is required.

Other loan options for home improvement

An FHA home improvement loan can be a great option for borrowers with lower credit scores and/or smaller down payments. The FHA’s lenient requirements make home renovations more accessible for buyers without a lot of cash in the bank. But keep in mind that all FHA loans, including home improvement loans, require mortgage insurance premiums (MIP). This will add to your monthly mortgage cost.

Because of the FHA’s MIP requirement, buyers who can qualify for a different type of home improvement loan might want to explore additional options.

Other options for financing home improvements can include:

• Home equity loan
• Home equity line of credit (HELOC)
• Cash-out refinance
• Personal loan
• Credit cards

Each funding option will have unique advantages and drawbacks, along with its own credit score requirements, interest rates, and loan terms. For example, a second mortgage, including a home equity loan or HELOC, is likely to offer better rates than an unsecured loan — but it will likely take longer to get the funds than a personal loan or credit card. Your budget, goals, and the amount of money you need for home improvements will determine the best financing option, and a mortgage loan officer can help you evaluate your options.

Check your FHA eligibility. Start here (Sep 16th, 2024)

FHA home improvement loan FAQ

How do I qualify for an FHA home improvement loan?

Most FHA home improvement loans will require a minimum credit score of 580 in order to buy a house using a 3.5% down payment. Otherwise, a score that falls between 500 – 579 will typically require a 10% down payment. In addition, the total debt-to-income ratio should not be higher than 43%. Borrowers will also be required to pay mortgage insurance and closing costs.

What is an FHA home improvement loan?

An FHA home improvement loan enables buyers to purchase a home that may be less expensive because it needs repairs. It rolls funding for the purchase and for renovations into one loan.

Can veterans get FHA home improvement loans?

Veterans are eligible for a VA Renovation Loan, which can be used to finance home improvements.

Can an FHA loan be used for renovations?

The FHA 203k loan is used for purchasing a house that doesn’t need renovation, allowing for a lower down payment and easier credit requirements that make the home more affordable.

What is an FHA 203k rehab loan?

The 203k loan is a property improvement loan, specifically designed to renovate homes that need at least $5,000 of home improvement projects.

What repairs can I get with an FHA loan?

Most repairs will either fix the structure of the home or essential features of the home, such as the roof, flooring, plumbing, or heating. Luxury repairs — like installing an outdoor fireplace or a swimming pool — are typically not allowed with an FHA loan.

What credit score is needed for a home improvement loan?

A minimum credit score of 500 is usually required for an FHA home improvement loan but it will ultimately be determined by the lender. Most lenders require a score of 580 in order to accept a 3.5% down payment. Otherwise, for scores between 500 – 579 the down payment will increase to 10%.

How can I get a home improvement loan?

The first step is to find a lender that has experience with FHA 203k loans. After choosing your lender, you’ll have to complete the application process and wait to see if you’re approved.

How do home improvement loans work?

Each 203k loan combines the cost of purchasing the home along with funds that are set aside in an escrow account in order to make needed repairs that are completed by a qualified contractor.

What type of loan is best for home improvements?

The FHA offers a variety of loan options for home improvements. Whether you get a Limited 203k, Standard 203k, or Title 1 loan will depend upon the amount of money you need for your home, whether the repairs will be structural, and how they improve livability. For example, the best loan option might differ if you’re making repairs to the home’s foundation.

How can I finance a home renovation without equity?

Most homes that need extensive repairs won’t have equity until those renovations are done. No equity is required to apply for a 203k or Title 1 loan and value will be assessed both prior and after the repairs are completed.

Check your FHA mortgage rates. Start here (Sep 16th, 2024)

The post FHA Home Improvement Loans | Rates & Requirements 2024 first appeared on My Mortgage Insider.

Also, if your FHA loan is under three years old, then you may be eligible for an upfront mortgage insurance premium refund. This refund allows a portion of the original loan’s paid premium to be applied to the upfront mortgage insurance premium of the new FHA streamline refinance loan. This means less money is required at closing.

Check your FHA streamline refinance eligibility today (Sep 16th, 2024)

In this article:

• Is an FHA streamline refinance worth it?
• Do I qualify for an FHA streamline refinance?
• FHA refinance rates today
• Our recommended refinance lenders
• How does an FHA streamline refinance work?
• What documents do I need?
• Closing costs for FHA streamline refinances
• Net Tangible Benefit requirement
• FHA mortgage refund
• FHA streamline refinance FAQ

Is an FHA streamline refinance worth it?

In general, FHA streamline refinances are worth it if there’s a financial benefit to you like a lower interest rate and monthly payment. This is true of all refinances — if it’s not going to benefit you, then it’s likely not worth it.

Streamline refinances offer some specific advantages when compared to other refinance loan types, including:

• No income documentation is required like pay stubs and W2s
• Lower available interest rates
• Faster closing times than traditional refinances
• No appraisal is required
• Underwater homes are eligible
• Potentially eligible for a partial refund of upfront mortgage insurance from your original loan

Check FHA streamline rates. Start here (Sep 16th, 2024)

Do I qualify for an FHA streamline refinance?

FHA streamline refinance loans are available to homeowners who currently have an FHA loan with good payment history. Homes that have lost value and are now underwater are eligible too.

The most important qualification though, is that borrowers must receive a benefit from refinancing. This is called a net tangible benefit — FHA refinances can be approved if the combined interest rate drop is at least 0.5% (see Net Tangible Benefit section below).

FHA refinance rates today

The refinance interest rate you’ll qualify for depends on factors like your credit score, interest rate type, and loan type. You’ll have to speak to lenders to determine the specific FHA refinance rate you’re eligible for. Compare quotes from three to four lenders to make sure you’re getting the best rate and terms — the CFPB reports that comparison shopping can save borrowers approximately $300 per year and thousands over the life of the loan.

Check current rates here.

How does an FHA streamline refinance work?

In general, FHA streamline refinances are easier to qualify for than home purchase loans. If you meet five key requirements, then your FHA streamline refinance will likely be approved. Those key requirements include:

1. On-time payment history

You must show a history of on-time mortgage payments for your existing FHA loan to qualify for an FHA streamline refinance. If you have had a late payment, you are not automatically disqualified though. You can rebuild your history moving forward and qualify 12 months after your second most recent late payment.

FHA streamline refinance loan payment requirements:

• If your mortgage is less than 12 months old, then all mortgage payments must have been paid on time.
• If your mortgage is 12+ months old, then no more than one payment is permitted to be 30+ days late. The three months’ payments prior to the loan application must have been made on time.

2. Net Tangible Benefit

All FHA streamline refinances must result in a Net Tangible Benefit (NTB) for the borrower — the refinance must improve the borrower’s financial position as defined by the FHA. Generally, NTB is defined as reducing the borrower’s “combined rate” by at least 0.5%. (A combined rate is the interest rate of the loan plus the insurance premium rate.)

For example, a homeowner has a current interest rate of 4.5% and an insurance premium of 1.35% for a combined rate of 5.85%. If the homeowner refinances into a 4% interest rate with an insurance premium of 1.35%, then the new combined rate of 5.35% is a 0.5% reduction.

The 0.5% “combine rate” reduction rule applies if you’re refinancing a fixed-rate mortgage into another fixed-rate mortgage. If you’re refinancing into (or out of) a one-year ARM or Hybrid ARM (3-, 5-, 7-, or 10-year ARM), then there are different NTB requirements.

Net Tangible Benefit (NTB) Combined Rate Requirements

3. FHA streamline waiting period

There’s a waiting period between when you first closed your loan and when you can refinance. So, if you’ve just closed on your loan, then you’re not eligible for an FHA streamline refinance.

The FHA streamline refinance waiting period requirements include:

• You have made at least six on-time payments on your current FHA mortgage
• It’s been at least six months since your first payment due date
• 210 days have passed since the day your current mortgage closed

For example, if your current FHA loan closed on November 28, 2018, then your first mortgage payment was due on January 1, 2019. You can refinance as soon as July 1, 2019 — 210+ days after closing and six months after your first payment.

Get your FHA streamline rate. Start here (Sep 16th, 2024)

4. Minimum credit score

The FHA does not require a credit report as part of the streamline refinance loan application. Most lenders will require one, though. A standard minimum credit score for the FHA streamline refinance program is 640. However, some lenders may allow a score between 600-620. If you’re denied, shop around.

Source: Ellie Mae Origination Report, December 2019

5. Closing costs for FHA streamline refinances

Closing costs on streamline refinances are generally the same as with other mortgages, except that there is no appraisal fee (unless you opt for one). You may also need to pay a portion of property taxes and insurance at closing.

For example, if your jurisdiction’s property taxes are due in the next few months, lenders require you pay that tax installment. Keep in mind, though, that you’ll receive a check from your current lender for taxes and insurance you’ve paid on your current loan, but haven’t been disbursed.

If you’re short on cash, then ask your lender if they offer lender credits — for a slightly higher interest rate, you can use the profits from the loan to pay for closing costs. Or, if you have equity in your home, then with an appraisal you may be able to wrap closing costs into the new loan amount.

My Mortgage Insider Tip

Are there closing costs with an FHA streamline refinance?

Generally, you can expect to pay between $1,000 and $5,000 in FHA streamline closing costs, though this amount may be higher or lower depending on your loan amount and other factors. You’ll need to provide 60 days of bank statements showing you have enough money to cover any out-of-pocket closing costs.

Your loan officer will provide an estimate of total funds due. This estimated out-of-pocket amount may increase during the mortgage refinance process, though. Be prepared to provide updated or additional bank statements to prove you have funds to cover the increased amount.

Note: Provide all bank statement pages, even blank ones, to your lender. Make sure your name, address, and account number appear on your statement too. Online bank printouts often don’t include your personal information, so you’ll need the mailed version or the PDF version of your full statement.

What documents do I need for an FHA streamline refinance?

Even though FHA streamline refinances have minimal documentation required for the loan application, that doesn’t mean there’s no documentation. Below is a list of things you’ll likely need for your refinance application, including your:

• Current mortgage statement
• Current FHA loan’s mortgage note, which shows your current interest rate and loan type
• Final settlement statement (final HUD-1) or Deed of Trust with the FHA case number of your current loan
• Employer HR department’s contact information (lenders need to verify your employment, not your actual income)
• Two months of bank statements that show you have enough funds to pay for any out-of-pocket costs
• Homeowners insurance agent’s contact information to obtain current proof of insurance

Also, make your next month’s mortgage payment as soon as possible. This allows your lender to obtain proof that your FHA mortgage is current. Your lender may require more or less than the items listed above.

Other things to note about FHA streamline refinances

While streamline refinances are generally easy to apply and get approved than other refinance options, there are some things to consider in regards to the FHA loan program.

Adjusting loan types and terms

The FHA has specific rules on what types of loan adjustments are allowed. Not every loan type can be converted to another loan type or term with a streamline refinance. Some of the most common questions on these adjustments are:

• Can I refinance my 30-year loan to a 15-year loan? No. The FHA does not allow reduction of your loan term with a streamline refinance.
• Can I refinance my 15-year loan to a 30-year loan? Yes. Your combined rate must decrease by at least 0.5%.
• Can I refinance my ARM to another ARM? Yes. You may use an FHA streamline refinance to refinance an adjustable-rate mortgage (ARM) to another ARM (for primary residences only).
• Can I refinance my ARM to a fixed-rate mortgage? Yes. Though, there are additional requirements depending on the type of ARM and the original closing date. (See the Net Tangible Benefit section.)
• Can I refinance my fixed-rate mortgage to an ARM? Yes. The combined rate requirement must be a 2% decrease.

Appraisals

There are two types of streamline refinances — those with an appraisal and those without. The majority of people opt for the no-appraisal option, because the application process is quicker, cheaper, and no equity is required.

So, why would someone get an appraisal on an FHA streamline refinance? Because you can only include closing costs in the new loan amount on streamline loans with an appraisal. Otherwise, closing costs have to be paid out of pocket (or with a lender credit).

If you order an appraisal, make sure you have enough equity in the home to cover the existing loan balance, closing costs, and any interest due. If you don’t have equity in your property, it’s best not to obtain an appraisal.

If you opt for a no-appraisal FHA streamline refinance, the maximum loan amount may include:

• The current principal balance
• Up to one month’s worth of interest payments
• The new upfront mortgage insurance fee (subtract the mortgage insurance refund if applicable — applies if FHA loan originated less than three years ago)

Mortgage insurance premiums

There are two types of mortgage insurance premiums (MIP) for FHA loans — upfront and annual. Upfront mortgage insurance premiums (UFMIP) is a one-time fee charged when you close the loan. All FHA loan types UFMIP is 1.75% on the base loan amount. Annual insurance premiums are paid over the life of the loan in most cases. Percentages vary and are dependent on the base loan amount, your down payment amount, and the loan term. (See FHA insurance premium rates.)

Mortgage insurance refunds

When you refinance a current FHA loan, you may be entitled to a refund of the upfront mortgage insurance you paid when you opened your existing FHA mortgage. Usually, refunds are only available if the FHA loan is refinanced into another FHA loan within the first three years.

The refund amount is determined by how long ago the current loan was opened, and when the new FHA refinance loan closes. The refund amount decreases each month. If you refinance within 12 months, you may be refunded as much as 60% of your original upfront mortgage insurance. But, if you refinance after 30 months, you’ll only receive about 20%.

Read more: FHA Mortgage Insurance Refund Guidelines [Chart]

FHA streamline refinance loans and condominiums

Many condominiums have lost their FHA eligibility over the past few years. FHA streamline refinances are available on condos that were approved at the initial opening of the loan, but have since lost their approval.

The exception: When an appraisal is needed to qualify for the loan. In this case, the condo complex needs to be currently FHA-approved.

Read more: How to Find an FHA-approved Condo Quickly and Easily

FHA streamline refinance loan FAQ

Is cash back allowed on an FHA streamline refinance?

Cash back is not allowed for a streamline refinance loans. For that, you’ll need to apply for an FHA Cash-out Refinance.

The FHA does permit a small amount of cash, usually less than $500, to go to the borrower. Some lenders limit the amount to $250 or less. The cash back can only be the result of incidental changes in closing calculations, which happens often with all mortgages.

Can I refinance my second home or investment property with an FHA streamline refinance?

In most cases, the FHA allows streamline refinances on second homes and investment properties as long as the property currently has an FHA loan. Some lenders only accept streamline refinances on primary residences. It’s best to ask your lender about their specific rules.

Also, if your monthly payment is increasing of the new loan type is an ARM, then you won’t be able to use a streamline refinance — they’re not permitted on second homes and investment properties.

Can I add or remove borrowers with an FHA streamline?

The FHA permits a borrower to be removed from the original loan as long as one of the original borrowers remains on the new mortgage. If you want to “assign” the loan to another borrower entirely, though, then you can’t use an FHA streamline refinance. Also, borrowers can usually be added to the title without income or asset review. Though, check with your lender specifically to see if they allow it.

Can I use an FHA streamline to refinance my completed 203k rehab loan?

The FHA allows this type of refinance without an appraisal, though, your lender may require one. The completed work must be evidenced by:

• A certificate of completion
• A final release of the rehabilitation escrow account
• The original lender’s completion of the 203k closeout process

Can I use an FHA streamline if my home needs repairs?

The FHA does not require repairs on a home that is in sub-par condition as long as there is no appraisal required for the transaction. If you opt for an appraisal (or, your lender requires one), then you will be responsible for completing those repairs before loan approval.

Check FHA refinance rates today

The FHA streamline refinance is a great option for current FHA homeowners to lower their interest rate and monthly payment. And, with lenient credit standards and documentation requirements it can be the fastest and most cost effective options to refinance an FHA loan.

Check your FHA streamline refinance eligibility (Sep 16th, 2024)

The post FHA Streamline Refinance Rates & Guidelines 2024 first appeared on My Mortgage Insider.

A piggyback loan is a way to save money by using two mortgage loans, instead of one loan, to buy a house.

Why use a second loan when one is all you really need? Because the second mortgage covers part of the down payment for the first mortgage, meaning you can reap the benefits that come with making a larger down payment.

By increasing the down payment amount, the borrower can save money. For example, paying 20% down eliminates the need for private mortgage insurance premiums.

How do piggyback loans work?

Piggyback loans are also called 80/10/10 loans, and if you’re wondering how these loans work, all you have to do is follow the numbers:

• 80: Represents the first mortgage, which finances 80% of the home’s purchase price.
• 10: Represents the second mortgage, which finances another 10% of the home’s price. This 10% counts toward the buyer’s down payment.
• 10: Represents the cash down payment provided by the buyer.

With this scenario, a buyer can benefit from a 20% down payment while paying only 10% down out of their own pocket.

There are other types of piggyback mortgages besides 80/10/10s, such as an 80/5/15, and 75/15/10. The second number always describes the second mortgage, and the third number describes the buyer’s cash down payment.

The second loan is often a home equity line of credit (HELOC), or home equity loan.

Are 80/10/10 loans available?

Many mortgage lenders offer piggyback financing in 2024.

Lenders have always offered the first mortgage — the 80% portion of the home’s purchase price. In the past, it was harder to find a lender for the 10% second mortgage.

Due to the popularity of the program, many lenders have created their own second mortgage program. Some lenders have also built relationships with other lenders to secure second mortgage financing for the home buyer — making it one seamless transaction as far as the buyer is concerned.

How do piggyback loans eliminate PMI?

Normally, private mortgage insurance, or PMI, is required when borrowers pay less than 20% down on a conventional loan.

With a piggyback loan, however, borrowers can put only 10% down but still get credit for a 20% down payment. The second mortgage provides the other 10% of the 20% down payment amount.

Why get two loans just to avoid PMI? Because PMI costs borrowers money, and the premiums protect the lender — not the borrower.

The PMI price tag varies by borrower. Annual premiums usually range from 0.5% to 1.5% of the primary mortgage amount each year. On a $300,000 first mortgage, 1% would equal $3,000 a year or $250 a month.

Other benefits of a piggyback mortgage loan

Eliminating PMI isn’t the only reason buyers like piggyback loans. This financing strategy can also:

• Help lower interest rates: A bigger down payment lowers the primary mortgage’s loan-to-value ratio (LTV), and a lower LTV will often help buyers dodge higher interest rates
• Keep loan within limits: Freddie Mac and Fannie Mae set conforming loan limits each year. A bigger down payment could keep your loan amount within this year’s limit, avoiding a non-conforming jumbo loan
• Save cash for closing costs: Even if you could afford a 20% cash down payment, parting with only 10% can leave room in the budget for closing costs, moving expenses, or new furniture
• Help you buy a new home while selling your old one: Some buyers pay off their piggyback’s second mortgage quickly — after selling another home, for example. They use piggybacking so they can buy with 20% down before selling their other home

A lot of interrelated factors will affect your home-buying budget. By increasing your down payment, piggyback loans can move more of these factors in your favor.

Types of piggyback loans

80/10/10 loans are the most common type of piggyback loan, but they aren’t the only type. Buyers can also find:

• 80/15/5 piggyback loans: This version shifts more of the financing burden onto the second loan, allowing buyers to bring only 5% to the closing table
• 75/15/10 piggyback loans: This piggyback loan increases the second mortgage by 5% so the buyer can put 25% down on the primary mortgage

As you can see by the numbers, these variations divide the home’s cost between the two mortgages differently. Otherwise, they work like any other piggyback loan: A second mortgage helps cover the down payment on the first mortgage.

80/10/10 vs 75/15/10

A piggyback loan’s variations aren’t random. There’s usually a reason behind the size of each loan.

For example, some homes — such as condominiums — may need a 25% down payment instead of 20% down. In that case, a 75/15/10 piggyback would be the way to go. This scenario could help with some investment property down payments, too.

For most single-family home buyers, an 80/10/10 piggyback offers just enough down payment support.

How to qualify for a piggyback loan

Compared to conventional loans with all-cash down payments, piggyback financing will require a higher credit score. That’s because you have to qualify for a second mortgage (a home equity loan or HELOC) on top of your primary mortgage.

Many lenders look for scores of 680 or higher for a second mortgage. That’s 60 points higher than the typical 620 score needed for a conventional loan.

Another qualifying factor for piggyback financing is debt-to-income ratio, or DTI. The payment amount for both loans — the primary mortgage and the second mortgage — will be factored into your DTI. DTI also includes your credit card minimum payments, auto loans, and student loan payments.

All these monthly debts, including your two house payments, can’t exceed 43% of your monthly gross income for most lenders.

Alternatives to a piggyback loan

If a piggyback loan’s credit score and DTI requirements won’t work for you, consider one of these alternatives:

• 10% down conventional loan: Buyers don’t need 20% down to get a conventional loan. Even with 10% down, you could get a competitive interest rate. You’d pay PMI but only until you’ve paid the loan down to 80% of the home’s value
• FHA loan with 10% down: FHA loans let buyers with average credit and lower down payments access lower interest rates. With 10% down, you can stop paying the FHA’s mortgage insurance premiums (MIP) in 11 years

Some buyers can also get USDA loans or VA loans which require no money down, but not everyone is eligible. USDA loans have income and geographical limits; VA loans are reserved for military service members.

Is an 80/10/10 less expensive than an FHA loan?

The minimum down payment for an FHA mortgage is just 3.5%. However, buyers can make a bigger down payment if they wish, and a 10% down payment on an FHA loan can save money in the long run.

If you have 10% to put down, should you use an FHA loan instead of piggybacking?

Before deciding, consider the FHA’s mortgage insurance premium (MIP), which charges 0.8% of the loan amount each year on a 10% down loan. For a $350,000 home, that’s $210 per month.

The MIP is required for the first 11 years of the loan with a down payment of 10%. With a smaller down payment, MIP is required for the life of the loan.

In addition to this monthly mortgage insurance cost, FHA charges a one-time upfront mortgage insurance premium of 1.75% of the loan amount. These closing costs can add up and make a piggyback mortgage cheaper than FHA.

But mortgage lending is personal. What’s true for most borrowers isn’t true for all borrowers. Some borrowers can save with an FHA loan, especially if their credit score is borderline — just high enough to qualify for piggyback financing.

The best way to find out for sure? Compare preapproval offers from several lenders to see which type of financing is most affordable for you.

Piggyback loans vs PMI vs FHA loans

If you’re making a cash down payment of less than 20%, you might be looking at three popular loan options: a piggyback loan, a conventional loan with private mortgage insurance (PMI), or an FHA loan with mortgage insurance premiums (MIP).

In a three-way match-up, which mortgage product comes out on top? Let’s look at an example of a home purchase of $350,000 with 10% cash available to put down.

*Rates are only examples and are not taken from current rate sheets. Your rate may be higher or lower. Click here to request current rates.

In this scenario, the piggyback mortgage saved the buyer $113 per month compared to a conventional or FHA loan.

Again, your actual experience will depend on the rates you qualify for based on your credit score, debt-to-income ratio, and income level. Your mortgage lender can help you run the numbers and compare costs for each option.

Why doesn’t everyone do a piggyback loan?

In the scenario above, the piggyback mortgage is the clear winner in terms of monthly payments. However, this loan program may not be for everyone. There are a few factors to bear in mind when making this financial decision:

• Piggyback mortgages often require a high credit score. You probably need a 680 score to qualify, but that will vary with each lender. Borrowers with a less-than-perfect credit score, an irregular income history or who are using a gift for the 10% down payment will probably need FHA or conventional financing.
• Piggyback loans may be harder to refinance later. Before refinancing, the second mortgage would need to be paid off or subordinated. To subordinate the second mortgage, the refinance lender would need to agree to make their loan second in importance behind the new first mortgage. In some cases, this agreement can be hard to get, making refinancing more difficult.
• There is no Streamline Refinance option for piggyback mortgages. Expect longer refinance times compared to an FHA refinance.
• The second mortgage rate is often variable and based on the current prime rate. As rates rise, so will the second loan’s payments.
• The second mortgage is often referred to as a HELOC, or home equity line of credit. Some HELOC second mortgages require only interest to be paid each month. So in five or ten years, the balance will be the same if the borrower does not make additional principal payments.
• Each loan will likely have its own terms, requirements and rules. You should be prepared to supply documentation for two separate loans as the 80% first mortgage and 10% second mortgage are often placed with two separate lenders, each with its own rules.

Piggyback loan pros and cons

Pros of piggyback loans

• Lowers monthly payments for many home buyers
• Avoids PMI with only 10% cash down payment
• Can get a primary mortgage within conforming loan limits

Cons of piggyback loans

• Second lien on the home from day one
• Second loan often has a variable rate
• Requires a higher credit score

Piggyback loan FAQs

What is a piggyback loan?

With piggyback loans, home buyers can use a second mortgage loan to boost the down payment on their first, or primary mortgage loan. For example, a buyer could bring a 10% cash down payment and use a second mortgage to generate cash for another 10% down. The combined 20% down payment avoids PMI.

What is the advantage of a piggyback loan?

Because they simulate a 20% down payment conventional loan, piggyback loans eliminate the need for private mortgage insurance. The bigger down payment can also keep the primary mortgage within conventional mortgage limits, eliminating the need for a jumbo mortgage on high-value real estate.

How does a piggyback mortgage work?

A piggyback loan is two mortgages: A conventional mortgage that’s normally a fixed-rate loan and a second mortgage that’s often an interest-only home equity line of credit. The second loan provides part of the down payment on the first loan.

Is it hard to get a piggyback loan?

It’s gotten easier to find lenders who allow piggyback loans. Borrowers need higher credit scores — usually FICO scores of 680 or higher — to get approval. Both loan amounts must fit within the borrower’s debt-to-income ratio, or DTI.

Are piggyback loans still available?

Yes. In fact, they’re easier to find since they’re in high demand. Some lenders will offer both mortgage loans. Others will recommend lenders for the second mortgage.

Piggyback or traditional? Which loan is right for you?

Home buyers need to make their own decisions about which loan type is best based on factors like future financial goals, credit score, home price, and their down payment. A loan officer can help you determine the best fit for your financial situation.

Check your home buying eligibility. Start here (Sep 16th, 2024)

The post Piggyback Loan (80/10/10 Mortgage) | Rates & Requirements 2024 first appeared on My Mortgage Insider.