6 Essential Steps to Consider for a Government-Backed Refinance
If you’re thinking about refinancing your government-backed or conventional mortgage, a government-backed refinance might be a good option. These loans, guaranteed by agencies like the FHA, VA, and USDA, come with specific requirements.
### What Is a Government-Backed Refinance?
A government-backed refinance involves replacing your current mortgage with a new loan guaranteed by a government agency such as the FHA, VA, or USDA.
### VA Loans
VA loans, backed by the U.S. Department of Veterans Affairs, offer several refinancing options:
– **VA Interest Rate Reduction Refinance Loan (IRRRL)**: This simplifies the refinancing process for existing VA loan holders. It doesn’t require a home appraisal, income verification, or credit review, but the new interest rate must be lower unless switching from an adjustable-rate mortgage.
– **VA Cash-Out Refinance**: This allows borrowers to take out a new loan for more than they owe and keep the difference as cash. You can borrow up to 100% of the home’s appraised value, though lender limits may vary. This option requires a home appraisal and credit check.
### USDA Loans
The U.S. Department of Agriculture offers refinancing for USDA loan holders in rural areas through several programs:
– **USDA Streamline Assist Refinance**: This doesn’t require a home appraisal or credit review if you’re current on your mortgage payments. The refinance must save the borrower at least $50 monthly.
– **USDA Streamlined Refinance**: This includes a credit review and debt-to-income ratio assessment but generally no home appraisal. It doesn’t require proof of a net tangible benefit.
– **USDA Rate-and-Term Refinance**: This requires a credit check and home appraisal.
### FHA Loans
Backed by the Federal Housing Administration, FHA loans offer three main refinancing options:
– **FHA Streamlined Refinance**: This is a quick and straightforward option for current FHA loan holders. The non-credit-qualifying version skips income verification, extensive credit reviews, and home appraisals.
– **FHA Rate-and-Term Refinance**: This allows borrowers to borrow up to 97.75% of the home’s value and requires income verification, a credit check, and a home appraisal.
– **FHA Cash-Out Refinance**: This lets you borrow up to 80% of the home’s value and provides cash by refinancing for more than the current loan balance.
### What To Consider Before a Government-Backed Refinance
When considering a government-backed refinance, keep the following in mind:
#### Your Financial Goals
Identify why you want to refinance. Common reasons include lowering monthly payments, accessing home equity, or changing loan terms. For instance, if mortgage rates have dropped since you first financed your mortgage or your credit score has significantly improved, it might be beneficial to see what rate you could qualify for with a refinance.
#### Seasoning Period
Ensure you’re past the seasoning period on your government-backed mortgage before refinancing. The seasoning period is the required waiting time before you can refinance.
– **VA Loans**: You must wait at least 210 days after your first payment before applying for an IRRRL and 210 days after your closing date before applying for a VA cash-out refinance.
– **FHA Loans**: For an FHA cash-out refinance, you need to make at least six payments. For an FHA streamlined refinance, you must wait 210 days from your closing date and complete at least six payments.