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FHA Home Refinance Versus Traditional Refinancing

FHA Mortgage Loan Services compares FHA and traditional refinancing so borrowers can make a decision based on the features and benefits. "Lenders are only refinancing those with 50% equity or more," said Mark Zandi, chief economist for Moody's Economy.com. Itís getting harder and harder to qualify for traditional (also known as conventional and conforming home loans) home loan refinancing sold to Fannie Mae (FNMA) or Freddie Mac (FHLMC) with lenders tightening up the qualification criteria to where most people can no longer qualify for a loan.

The federal government created FHA loan programs to encourage homeownership throughout the country. The Federal Housing Administration (FHA) is part of the Department of Housing and Urban Development (HUD). The FHA can help people to obtain a loan with little or no down payment. The FHA does not supply the loan. It simply insures the loan to limit the risk to the lender.

FHA and traditional mortgages have similar interest rates. But, the FHA loan guidelines are more relaxed than conventional loan guidelines; this includes less strict regulations about past bankruptcies and/or foreclosures, job requirements, use of alternative credit, and debt-to-income ratios. In exchange for these more relaxed standards, borrowers have to pay a mortgage premium equal to 1.5% (2% under the new housing laws) of the loan amount that is paid at settlement.

In most FHA home refinancing loan cases, this mortgage insurance premium is included in your loan amount, so you are really paying it over the life of the loan. In addition, on loans with a term of greater than 15 years and a loan-to-value (LTV) ratio of 90% or greater, you will also have to pay an annual mortgage insurance premium (MIP) of 0.5% of the loan amount in monthly installments. This premium protects the lender in case the borrower defaults on the loan.

Besides being harder to qualify for, traditional mortgages also charge a mortgage insurance premium if you have less than 20% start-up equity in your home. Even now the FHA insurance premium is now tax deductible until 2010. Hereís a breakdown of the benefits of FHA loans over traditional loans:

  • FHA doesn't require as much equity for refinancing.

  • FHA does not require as much money for a down-payment when financing a home purchase

  • Lower monthly mortgage insurance than traditional loans on homes with less than 20% start-up equity.

  • FHA loans have low closing costs, which are regulated by HUD.

  • FHA has no credit score requirements.

  • Qualify for a FHA loan two years after a bankruptcy.

  • Qualify for a FHA loan three years after a foreclosure.

  • FHA loans have no pre-payment penalty and conventional mortgages may have a penalty if refinancing in the first one to three years of the loan .

  • FHA loans are assumable, and the seller or lender must pay part of the traditional closing costs (called non-allowable costs) while a borrower's allowable costs can partially be wrapped into the loan.

You donít necessarily have to have a FHA loan to refinance to a FHA loan. Even under normal circumstances, you can refinance a conventional loan to a FHA loan. Loan options include: cash-out refinancing and rate-and-term refinancing. The FHA also offers borrowers debt-consolidation programs, and the option to consolidate two mortgages into one FHA mortgage. A FHA home refinancing is the only true sub-prime lending options for homeowners who have 10% or less equity available in their home.