What you need to qualify for a refinance now
September 21, 2009 · Tagged with Loans
During the boom years, homeowners avoided PMI by taking piggyback mortgages — for example, a first mortgage for 80% of the home’s price and a second mortgage for the balance. That tactic has almost disappeared.
The PMI problem is one reason the Federal Housing Administration, long a haven for the credit challenged, is doing land-office business these days. In late April , the average 30-year fixed rate on an FHA loan was 5.02%.
With FHA, you can refinance with only 2.25% equity. FHA provides its own mortgage insurance, for which you’ll pay both an upfront and a monthly premium. FHA itself doesn’t impose a credit-score threshold, but some FHA-approved lenders require a minimum credit score, from about 580 to 620.
You should know that Fannie and Freddie generally set the limit for mortgage-loan payments at 36% of your monthly pretax income, unless you can prove you can handle more.
I’m underwater on my mortgage and my payment is killing me. What can I do?
Small consolation, but you have a lot of company: One in five homeowners now owes more than their home is worth, according to First American Core Logic. The goal here isn’t necessarily to lock in the lowest interest rate, but simply to qualify to refinance with a mortgage you can afford. You may have two options, presuming that you have a job and meet other qualifications.
The first is the Home Affordable program. Announced in March by the Obama administration, this helps homeowners who owe more than their home is worth and need a more affordable payment. The Home Affordable refi will feature a market rate of interest that’s fixed for at least five years.
It’s no panacea. You’ll qualify only if Fannie Mae or Freddie Mac owns your current loan (to find out more, visit www.makinghomeaffordable.gov). The loan amount can’t exceed your home’s value by more than 5%. That limit disqualifies plenty of homeowners in distressed markets in California, Arizona, Nevada and Florida, where home values have plummeted. The program ends in June 2010.
The second is the Hope for Homeowners program. This may help if you’re at risk of default or already in foreclosure or bankruptcy. So far, these FHA-insured loans have had relatively few takers (recently only 51 of the loans had closed). That’s because the cost is high for both lenders and borrowers — although hopefully less onerous to both than the cost of foreclosure.
The Obama administration has proposed fixes to the program to make it more effective, including easing eligibility requirements for borrowers and reducing their costs. For more information about eligibility and where to apply, visit www.hud.gov/hopeforhomeowners.
What about jumbo loans?
As long as you can jump the hurdles to qualify and the loan you need falls within the limit for your metro area, conforming jumbos are readily available. In late April, the average 30-year fixed rate on a conforming jumbo was 6.36%, and the average 5/1 adjustable rate was 4.98%. The loan limit for conforming jumbos backed by Fannie, Freddie and the Federal Housing Administration is 125% of the median home price in your metro area — up to a maximum of $729,750 in high-cost areas.