Refinancing Options For Low Income Families
Owning a home provides security and a long-term investment for individuals, couples and families. However, sometimes homeowners run into financial challenges or want to cash in on the equity in their homes to fund high-expense purchases, remodeling projects or debt consolidation. Refinancing offers an option, but if you are a low-income homeowner, it’s a challenging endeavor. Fortunately, there are several potential avenues, depending on the source of your original loan.
The Federal Housing Authority Refinancing Options
The Federal Housing Authority has a mortgage insurance program that reduces the risk to lenders who provide mortgages to low-income homebuyers. If your original mortgage is an FHA-backed loan, you have four refinancing possibilities.
FHA Streamline Refinance
The streamline refinance option is best if you want to reduce your monthly mortgage payment. You will not only lower your interest rate but also get through the application process quickly, providing rapid mortgage relief. An FHA Streamline Refinance loan requires less paperwork, and you may not need to have a new appraisal on your house.
Eligibility Requirements
To qualify, your loan must be current, with no missed payments. Your existing FHA loan must be at least 210 days old, with a minimum of six monthly payments. The FHA also requires that this new mortgage provide you with a tangible benefit, such as a lower mortgage payment.
FHA Cash-Out Refinance
A cash-out refinancing allows you to take out a loan for more than you currently owe on your mortgage. The new mortgage pays off your original loan, and you get access to the extra funds. This is an excellent option if you want to upgrade your home, pay off higher-interest credit card debt or send your kids to college.
Eligibility Requirements
To be eligible, you must already have an FHA-backed mortgage and live in the home as your primary residence. You should have at least 20% equity in your home to qualify for a cash-out refinance loan. You can only apply for the cash-out refinance if you have made your mortgage payments on time for the past year.
The FHA also sets a minimum credit score of 580 for this type of mortgage, which is lower than conventional refinance loan requirements. You should have a debt-to-income ratio of 43% or less. One final eligibility requirement is that the loan-to-value ratio must be no more than 80% of the home’s current value, which means you will need a new appraisal.
FHA Limited 203(K) Rehab Refinance
If your reason for refinancing is to repair or renovate your home, the FHA 203(k) Rehabilitation Refinance loan may be the right option for you. With this loan, you can refinance your home for more than you owe on your existing mortgage, as long as you use the money for approved renovations.
Your renovations cannot cost more than $35,000, and you cannot use the loan for extensive remodeling or repairs. Eligibility for the FHA 203(k) loan is the same as the requirements for an FHA mortgage.
FHA Simple Refinance
The FHA Simple Refinance mortgage is the only FHA option available to homeowners who don’t currently have an FHA-backed loan, allowing you to turn your existing mortgage into a new fixed- or adjustable-rate FHA loan. You must meet the eligibility requirements for an FHA-insured mortgage. You also won’t be able to get cash back with this loan.
The Fannie Mae Refinancing Option
Fannie Mae and Freddie Mac are two government-sponsored enterprises that own 62% of all conforming mortgages. Chances are that if you don’t have a government-backed mortgage, one of these two enterprises owns your current mortgage. You can look up whether Fannie Mae holds your home loan on the Fanni Mae website.
You may be eligible for the company’s RefiNow program if you have a Fannie Mae mortgage. This loan is specifically for low-income families. The goal is to make it easier for homeowners with lower incomes to reduce their monthly mortgage payments.
RefiNow Existing Loan Eligibility
You can only apply for a RefiNow loan if you have a conventional loan that Fannie Mae owns or secures. Your existing mortgage must also be at least a year old and not one of the following:
High LTV refinance loan
Refi Plus loan
DU Refi Plus loan
If your current loan qualifies, you can apply for a RefiNow loan, offering a fixed-rate mortgage with a $250 maximum cash-out option.
RefiNow Borrower Eligibility
Eligibility for these mortgages is limited to those whose incomes are a maximum of 100% of the area median income. If your income is at or below this limit, you may be eligible for the loan. However, if there are multiple signors to the loan, the lender considers the incomes of all borrowers.
US Department of Agriculture Refinancing Option
The USDA has three refinancing options geared to help homeowners with low-to-medium incomes. These programs allow you to lower your interest rate and monthly payments. There is no cash-out option.
USDA Streamline Refinance
The Streamline Refinance program allows existing USDA borrowers to reduce their interest and mortgage payments quickly. Your loan must be at least 1 year old, and you must have made on-time payments for at least the past six months. Your new loan amount cannot be higher than your existing loan, and you may need to meet lender credit and debt-to-income requirements.
USDA Streamline-Assist Refinance
The Streamline Assist program offers the most favorable refinancing route for low-income borrowers with an existing USDA direct or guaranteed loan. This mortgage does not require a credit check or proof of qualifying DTI. You only need a new appraisal if you have a USDA direct loan. Your new mortgage needs to result in at least a $50 reduction in your mortgage payment.
USDA Non-Streamline Refinance
This final program is a good option to eliminate the $50 reduction requirement for your new mortgage payments. You will need a new appraisal, no matter your USDA loan type.
Help for Low-Income Borrowers
Finding the help you need to purchase, improve, or remain in your home can be challenging if your income does not fall within the traditional guidelines for conventional mortgages. FHA Insider provides information on resources and programs available to you, so you can make informed decisions and get the assistance you need.