5 FHA Loan Guidelines for Refinancing

FHA loan guidelines, provided by the Federal Housing Administration, are a set of requirements that both lenders and clients need to follow, prior to going into contract for an FHA-approved loan. These guidelines are set to protect both the lender and the borrower. It is important to remember, though, that FHA refinancing is only available to those who are using their current home as their principal residence.

1. Mortgage Insurance

Part of the FHA loan guidelines include mortgage insurance, that protects the lender from any losses that can result from defaults on the mortgage. Just like with a lender, FHA requires mortgage insurance for any borrower that has given a down payment of less than 20 percent.

2. Loan Limit

The FHA also sets a lending limit to both the borrowers and the lenders. However, each state has a specific lending limit. You can check with your local FHA office to learn how much the lending limit is.

3. Determining Closing Costs

As part of the FHA loan guidelines, a limit to the closing cost is defined. This means that the FHA determines what cost is allowed to be charged to the borrower. The requirements also define the amount and specific costs that are reasonable. This amount is determined by each local FHA office. In this regard, each state has different closing costs. Any other costs outside of these requirements are not allowed under FHA. This means that the borrower has to pay any other costs involved in buying a new home, or the lender will pay if refinancing an existing FHA loan.

Part of these costs include any attorney’s fees, origination fee of the lender, property survey, certification and test fees, home inspection fees up to $200, as well as deposit verification fees. The FHA loan guidelines do allow for wire transfer fees, courier fees, fees to pay off bills and reconveyance fees.

4. Setting Debt to Income Ratios

To prevent borrowers or homeowners from buying a property that is way beyond their means, FHA loan guidelines also incorporate qualifications for debt to income ratios. This simply means that the FHA has qualifications which need to be met. They will calculate if the borrower is in a financial position to meet the demands of owning a home. There are 2 ratios used--the mortgage payment expense against the effective income, and the total fixed payment against the income. For the first, total mortgage payment including the interest and principal, hazard insurance, the homeowner’s dues and others, are divided by the gross monthly income. For the second ratio, the total mortgage payment is added with all recurring monthly installments and revolving debt, and then divided by the income.

5. Credit Standing/Rating Issues

Just like any other loan, part of the requirements for refinancing through the FHA is good credit standing. A solid record for timely payment is often considered. Any issues or problems regarding the borrower’s credit are taken into account. Some of the concerns that are considered include non-existent credit history, any late payments, foreclosures, federal debts or collections, as well as Chapter 13 bankruptcy. If any of these issues are found in the borrower’s credit history, then the possibility of qualifying for a loan under FHA loan guidelines may be small.