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How Do Government Refinance Programs Work?

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When it comes to refinancing a mortgage, many homeowners want a lower interest rate or monthly mortgage payment that improves their cash flow. For those without a conventional loan, there are multiple government refinance programs available that can help make this possible — often without the need for credit underwriting or a home appraisal.

A mortgage refi means you’re replacing your existing mortgage with a new one that hopefully has better terms or improves your finances. That’s why it’s crucial to weigh your options before moving forward.

3 types of government refinance programs

Three government entities — the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA) — offer special refinance programs to existing borrowers who qualify.

FHA refinance loans

If you currently have an FHA loan, you can potentially speed up your refinancing process by applying for an FHA streamline refinance.

This type of FHA refinance involves limited underwriting and doesn’t require a home appraisal or full credit history check, which translates to a faster and less costly process.

There are closing costs involved, which can be paid out of your own pocket or via gift funds. If you can’t or don’t want to pay upfront, your lender can pay those costs for you in exchange for a higher interest rate.

Who is eligible?

To qualify for an FHA streamline refinance, you must:

  • Have an existing FHA loan that’s at least seven months old
  • Have on-time mortgage payments for the last six months
  • Have no more than one late payment over the last 12 months
  • Pass a benefits test related to your refinance goal, for example, lowering your interest rate by at least a half percentage point (0.5%)

VA refinance loans

Military service members, veterans and eligible surviving spouses with a current VA loan might reap monthly savings if they qualify for an interest rate reduction refinance loan (IRRRL).

As the name suggests, this type of refinance is intended to help VA borrowers who want to secure a new mortgage with a lower interest rate and a — potentially — lower monthly payment. An IRRRL is the VA’s version of a streamline refinance.

IRRRLs don’t require a home appraisal, income documentation or credit underwriting, and may even be done with no out-of-pocket costs to the borrower, provided they roll their closing costs — including the 0.5% VA funding fee — into their new loan amount.

Who is eligible? 

To qualify for a VA IRRRL, you must:

  • Have an existing VA loan that’s at least seven months old
  • Be current on your monthly payments
  • Receive a rate reduction of 0.5% or more
  • Keep your monthly payment increase below 20% (if applicable)
  • Reach your break-even point, which is the point at which you recoup your refinance closing costs in comparison to refi savings, within 36 months

USDA refinance loans

Rural homeowners with a current USDA loan can apply for the USDA’s streamlined assist refinance program.

This government refinance program helps borrowers replace their mortgage without a credit review or home appraisal. There are also no debt-to-income ratio calculations or home inspection requirements.

Who is eligible? 

To qualify for the USDA streamlined assist refinance, you must:

  • Have an existing USDA loan that is at least 12 months old
  • Have no late payments over the last 12 months
  • Receive a monthly payment reduction of $50 or more

HARP replacement programs

The Home Affordable Refinance Program (HARP), which was created to help underwater homeowners refinance their mortgage after the housing crisis of 2008, expired in 2018. A borrower is considered to be underwater when their outstanding loan balance is higher than their home’s value. The following HARP replacement programs have since filled the void for struggling homeowners:

Fannie Mae High LTV Refinance Option (HIRO)

Fannie Mae’s High LTV Refinance Option is a program that caters to borrowers with conventional loans owned by Fannie Mae. LTV stands for loan-to-value ratio, which is the percentage of a home’s value that is financed through a mortgage.

Key requirements include having a minimum LTV ratio of 97.01%, and a mortgage that is at least 15 months old.

Freddie Mac Enhanced Relief Refinance® Mortgage (FMERR)

Freddie Mac’s Enhanced Relief Refinance Mortgage is exclusive to borrowers who have a conventional loan owned by Freddie Mac. Similar to Fannie’s program, you’ll need a minimum 97.01% LTV ratio to qualify.

Other requirements include having a mortgage that’s at least 15 months old and no more than one late payment over the past year.

Pros and cons of government refinance programs

Pros

  • Your refinance timeline may be shorter. Because there’s limited documentation and underwriting compared with traditional refinance requirements, you may get to the closing table faster.
  • You won’t have to stress about your credit score. There are no credit score minimums with streamline refinance programs. However, you’ll want to maintain on-time mortgage payments to qualify.
  • You won’t have to pay for a home appraisal. A home appraisal may cost $300 to $400 or more. With a streamline government refinance program, you won’t have to worry about shouldering this cost, as appraisals typically aren’t required.

Cons

  • You may not qualify. If you’ve had several late mortgage payments recently or don’t have a current mortgage backed by the FHA, VA or USDA, you’re unlikely to qualify.
  • You’ll pay closing costs. A mortgage refi costs money. Whether you pay your closing costs out of pocket, roll them into your loan or take a higher mortgage rate, you’ll need to cover these expenses.
  • You may not receive a tangible financial benefit. Mortgage rates have been historically low for the last year or so. Unless your current mortgage rate is relatively high, the cost to refinance could outweigh your potential savings.

Other homeowner relief program options

  • Forbearance. If you’re experiencing a temporary hardship such as a job loss or reduction in income, you may qualify for a mortgage forbearance. This program allows your lender to reduce or suspend your monthly mortgage payments for a set time period, such as six or 12 months. You in turn will make arrangements with your lender to repay what’s owed once your forbearance period ends.
  • Modification. A mortgage modification involves changing the original terms of your home loan, such as extending your repayment term or lowering your mortgage rate. This differs from a refinance because you keep your original loan; it’s simply modified to make your payments more affordable. Modifications are often reserved for homeowners who are on the verge of falling behind or are already in default on their loan.
  • Repayment plan. Once you already have a past-due amount on your mortgage — say, from participating in a forbearance program — one way to get current is to set up a repayment plan with your lender. You’ll divide up the past-due balance over a set term, and add it to your regular monthly payments until it’s fully repaid.
 

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