Refinancing your mortgage with an FHA Loan

By Tony Caro

Among the several programs put in place by the federal government to promote home ownership, there is one that offers homeowners a number of benefits. The FHA loan, insured by the Federal Housing Administration, allows lenders to give would-be homeowners a better deal on their mortgage. This also means that a homeowner has the opportunity to get a mortgage more quickly with easier qualification, a low closing cost and a low down payment.
 

Who Can Benefit From An FHA Loan?
 

There are five situations from which would-be homeowners can benefit from getting an FHA loan.
 

1. Those looking to improve the energy efficiency of their homes can take advantage of the FHA Energy-Efficient Mortgage. This option eliminates the need for homeowners to take out a second mortgage on their home in order to cover energy efficiency upgrades.
 

2. Seniors wanting to get money from their homes but continue to live there can do so with the FHA Reverse Mortgage, which allows for partial conversion of home equity into cash.
 

3. First-time home buyers can enjoy down payments as low as 3.5% of the purchase price of their 1-4 unit property, with fees and closing costs included in the loan.
 

4. Those who need financing for a mobile or factory-built home can take advantage of two FHA products.
 

5. One-loan coverage for those looking to either purchase a fixer-upper home or remodel or repair their current home is available.
 

What's Needed To Qualify For An FHA Loan?
 

There is an income requirement for the FHA loan. Your DTI (debt-to-income) ratio - which is your total monthly household expenses divided by your total monthly gross income - must be at .43 or lower. Looking at your credit report will reveal some of your monthly expenses, which will need to be added to your property taxes, insurance and your new mortgage payment amount.
 

If you are self-employed and have had your business for two years or more, the question of your FHA loan qualification can be answered by consulting your tax return for your net income after deductions. Dividing that number by 12 will reveal your total monthly gross income. However, these aren't the only two ways you can qualify. If your debt ratio exceeds their limits, you may still qualify for an FHA loan if you:
 

-  Have three months of reserve savings in your bank account after closing;
-  Use credit sparingly; 

-  Either paying an amount that equals or exceeds new mortgage payment amount;

-  Can verify an earnings increase;
-  Will see a minimal increase in your housing payment.
 

Why FHA Loans Aren't For Anyone
 

Although the FHA loan has many benefits, as with anything else you're looking to purchase, there are always caveats.
 

First of all, you will have to have some sort of credit history in order to be able to apply for an FHA loan. Even though your credit doesn't have to be perfect, you will need to show at least some evidence that you are capable of handling credit. There may be considerations for extenuating circumstances, such as when a wage earner falls ill, as well as for bankruptcies and collections.
 

FHA loans come with a 1% up front, and 0.85 to 0.9% annual insurance premium for the first five years. And this is regardless of whether or not your home has sufficient equity or your loan to value ratio is 20%.
 

You will also see a lower loan amount with FHA loans, which means you may not be able to borrow as much as you need.
 

Finally, there are fewer options for home loans with FHA than there are for other loaning institutions. This is because the FHA loan serves the basic needs of a particular group of buyers. As such, the loans are of low risk to lenders.
 

The FHA is just one option when the goal is to become a homeowner. Understanding which options are available to you can mean that you're more informed when the time comes to make a decision about how you want to handle your mortgage.

Citations:

• Information on FHA Loans
  

Guest author Tony Caro writes on a variety of topics, and is particularly well-versed in the topic of refinancing your home mortgage.  He is a frequent contributor at http://www.refinancehomemortgageguide.com/.  You can also find Tony on Google.

When to refinance real estate loans

 

Wise refinancing is a budget makeover blessing. The decision to refinance also makes financial benefits more possible when utilized to its full potential. This is because aside from being a safe place to live or raise children, the right property mortgage offers the opportunity to build financial security, generate an income and even save money by growing food.

Real estate does not have to provide a yield, and depends on whether or not a property will be a primary residence or an investment. In many cases, mortgagees benefit from accumulated equity, which is the value of a building minus outstanding mortgage owed on it. In effect, this makes real estate a kind of savings instrument. Some  advantages  specific to refinancing mortgages are listed below:

• Lower monthly payments
• Equity enhanced qualification
• Streamlined application process
• Competitive interest rates
• Inclusion of renovation costs

Before re-applying for a mortgage, it is important to go over some key principles. These concepts are important because they affect the affordability, financial advantages and total cost of a mortgage. Moreover, proper understanding and weighing of the following mortgage components and their influence on buyer finances adds reason to refinancing, and makes the right refinancing choice worthwhile. 

• Time left on existing mortgage
• Future value of property
• Total interest costs of refinance
• Remaining balance of mortgage
• Early payment and loan terms

After identifying and measuring the impact of refinancing using the aforementioned items, the next step to think about is how much a mortgage will cost. How a loan is amortized or paid off over time has a substantial impact on the outlay. To illustrate, interest on a mortgage is not typically paid evenly throughout the life of the loan. Oftentimes, the largest part of the interest is paid in the first five years because lenders know that statistically, mortgagees are more likely to sell the property or relocate after this time period. When reviewing refinancing options, try these techniques to clarify the benefits and any disadvantages:

• Compare mortgages side by side
• Determine interest rate savings
• Evaluate effect of extra payments
• Assess impact of refinancing costs
• Weigh advantages of shorter term

When a mortgage is refinanced at a lower rate, it provides property and home owners a chance to lower their total expenditures. For instance, a mortgage refinance at a rate just 25 basis points or .25 percent lower than a mortgage loan of $125,000 with an original rate of five percent, and including insurance and property tax, costs $6,828.43 less over a term of 30 years. When considering refinance options, take the time to determine if the total savings from the lowered interest rate exceeds the cost of resetting the amortization schedule plus refinancing fees. If they do, then refinancing a mortgage is more likely to be the right choice.

Mechanics of successfully implementing a 1031 real estate exchange

A 1031 Property exchange is a legal tax avoidance vehicle used in real estate investing. The number 1031 originates in the U.S. Internal Revenue Service (IRS) tax code from which it derives. According to this IRS tax code, the 1031 tax deferment may be applied when an investment property is sold and exchanged for a similar type of property.

The process for facilitating the exchange is conceptually fairly straightforward, however the process may not be. Several parties, financial instruments and events must occur before the exchange takes place. What's more in most probability the 1031 exchange will include at least a few of the following: Contracts, escrow accounts, negotiations, real estate agents/brokers, title companies, mortgage banks, accountant(s( and/or lawyer(s).

The step by step process

1. The property must be held/owned for less than 2 years and the exchange must take place within 180 days of releasing the first property.

2. Locate and hire a financial intermediary ex- mortgage bank with a real estate services division and/or execute the exchange through an Escrow account transfer

3. Determine the type of 1031 transfer. For example: Simultaneous exchange or delayed exchange.

4. If simultaneous and using an investment intermediary, the intermediary acquires both properties through an escrow account and exchanges them to the parties involved.

5. If a delayed exchange, the property is sold, however the sellers proceeds are held by the escrow until a new property is located. A replacement property must be found before 180 days and identified as such be the former seller.

6. An exchange contract must be created and agreed upon by all parties and the exchange takes place.

Properties invested in outside of the United States do not qualify for this tax break and unless a subsequent exchange occurs following the first exchange, tax may be incurred on the sale of the exchange property when the latter property is sold.

Delayed 1031 exchanges

In the instance of a delayed 1031 real estate exchange, the property investor first sells a home to a buyer with the intention of trading the property at a later date. This later date is usually either under 45 or 180 days.

During the transfer period the property's value is held through an escrow account until an exchange property is located. When a property is located, a written document informing the escrow manager must be filed. The process for buying the second property then begins which may include the several parties and financial instruments mentioned above.

Additional tips to consider

• Excess money acquired through or from factors relating to the exchange but not included in the exchange is subject to taxation.

• More than two properties may be involved in the exchange

• The exchanged investment property must adhere to the same ownership criteria as the original investment property Ex if held in joint tenancy, the newly exchanged property must also be held in joint tenancy by the same owners to qualify.

• An exchange property can be acquired before the original property is sold i.e. reverse 1031 exchange. While it is possible for an experienced and knowledgeable property investor to facilitate this process with as few collaborators as possible, it is probably advisable to utilize at least a real estate broker for their know how and experience in the 1031 process.

The tax benefits alone could pay for the Realtor's commission and save a lot of headache regarding contracts, locating suitable properties, setting up escrows, title searches etc. 1031 real estate exchanges involves specific tax code provisos. So it may be helpful to investigate the legal specifics and requirements of the tax code before initiating the exchange.

What does it take to refinance a mortgage?

Refinancing a mortgage for a lower interest rate can be a great way to reduce monthly expenses and lower the overall cost of a home. There are a number of refinancing options available to consumers, but the mortgage refinancing benefits and process can vary between financial institutions. Generally, what it takes to refinance a mortgage is influenced by a few essential variables.

• Credit rating
• Debt to income ratio
• Equity in home
• Valuation of the home
• Individual cash flow

Online financial institutions may be able to offer better quotes with a digital network, however local banks may have better service. Also, as financially beneficial a mortgage finance process can be, it is important to keep in mind how the costs breakdown over time.

Assessment of the refinance terms

Before signing the contract for a mortgage refinance it is important to determine whether or not the refinance will be worthwhile and how much you will save, have to pay etc. To do this, calculate the amount of a refinanced mortgage and compare that to your current mortgage payment.

For example, if a current home valued at $225,000 has a monthly payment of $1363.49 and the refinance is for 5.4% the new monthly payment is $1263.44, however this does not include costs that may be built into the previous monthly payment such as annual property tax, hazard insurance, and mortgage insurance.

If these additional costs add up to 30 basis points or .3%, then the monthly payment becomes $1305.90. Add to this refinance costs and principal lost to the resetting of the amortization schedule. Moreover, if the refinance costs are $2000.00 and included in the mortgage, the cost becomes $1317.51 per month.

In addition to the above, if the original mortgage is 5 years old and is reset to 30 years at the new rate, 360 new interest payments will become due on top of the 5 years of interest already paid. If the new amortized interest plus the previous 5 years of interest adds up to more than the previous mortgage at the 6,1% rate, then the refinance is not worthwhile. For these reasons, be sure to include enough percentage difference between the refinance and the existing mortgage to make it worthwhile.

Pre-qualification

Pre-qualification at a couple of well selected mortgage refinance facilitators can come with as little as a good credit score. The pre-qualification may also provide a prospective mortgagee with several competing quotes. However, pre-approval for a mortgage requires more documentation than pre-qualification. Typically a mortgage refinance requires the applicant to demonstrate debt to income ratio, net asset value, gross annual income, tax compliance, and property details such as assessed value, title deed, and insurance.

Choosing a bank

Choosing between a local bank and online banks for mortgage refinancing is an important decision in the home refinancing process. If your local bank provides good service, knows you and has interest rates as low as online financial institutions or refinance quotes, this bank may be a better choice. This is because for something as expensive and involved as a mortgage, it can be helpful to have the face to face and telephone contact in addition to proximity in the case of sorting out details related to personal finance.

Refinance planning

In a New York Times interview by Bob Tdeschi with mortgage industry experts Regina Garlin and Nicholas Bratsafolis, Bob Tedeschi highlights the relevance of timing when applying for home refinancing. Moreover, Tedeschi's interview brings up the concern that mortgage refinances could fail or not be worthwhile because mortgage rates will not stay at historical lows forever, and home equity values may drop below a point required for the refinance to be approved. In other words, mortgage processing times themselves can take up to 3 months, in which time the value of a home's mortgage may drop below the traditional allowable refinance.

To illustrate the above point, if your home currently has an assessed value of $275, 000.00, and your current mortgage is for $260,000.00, the real estate's value may be getting too low for the bank to approve a traditional refinance. You may also want to keep in mind the affect of refinancing cost on the mortgage application if that cost is included in the refinance value. The reason for this consideration is that the mortgage value may rise above assessed value after these refinance costs are included.

Tips for Getting a Mortgage on a Small Property

If an individual can afford consistent monthly rent payments, that individual may also be able to make payments on some small property mortgages. While mortgages may not be right for everyone, mortgage loans for small property can be more manageable than a larger, potentially less practical mortgage loan. This article will illustrate some of the key issues pertaining to the mortgage acquisition process and provide tips and ideas that may useful for persons wishing to obtain a mortgage for small property.

Personal considerations

Obtaining loans for and owning property involve more time and effort than renting, however it may be worthwhile if more freedom, financial control and individual responsibility for property is called for. Mortgage loans are also used in real estate investing to leverage income potential. Before tackling the financial issues of a mortgage, a couple of personal reflections may prove beneficial in the property buying process.

• Assess Personal Needs and Traits: Mortgages may not suit everyone. When owning property there is more personal responsibility for property maintenance and repair that in the case of rental agreements may be taken care of by the property management company.

• Forecast Future Living: If one has a young family or is moving into the empty nest stage of life, a smaller property may or may not be a necessity. Knowing what living requirements would be most suitable ahead of time can help one determine whether a small property mortgage is the right thing to do.

Financial considerations

• Loan Type: There are many mortgage loan products available on the market. Finding the right one can be the difference between an out of control housing situation and a constant and manageable real estate loan. Some loans require home appraisals and high credit standards while others may require average credit scores but high earnings capacity.

• Mortgage Lender: Determining which mortgage lender is right is an important step in finding a mortgage. A few good places to start inquiring about loans may include large and small lenders alike. The Federal Housing Administration (FHA), and other well established financially solvent mortgage lenders such as Fannie Mae, Wells Fargo and Company or Bank of America constitute some of the reputable national lenders. Additionally smaller, fiscally responsible local banks may also be ideal depending on where one is located, one's relationship with the bank and the loan product.

• Additional Expenses: Property ownership can involve additional expenses such as home warranty agreements, utilities and replacement equipment. In a rental agreement, many of these additional costs are paid for as defined in the lease terms. Being aware of the potential for such additional expenses can make home ownership less of a surprise and a more realistic proposition.

• Cash Down Payment: The larger the up front cash payment, the lower the monthly mortgage payment and monthly expenses will be. Things like mortgage insurance and higher interest rates can be waved with large down payments making them a good idea if feasible. Moreover, if it is affordable, a 20% or higher down payment may be a good idea if that capital can't yield a higher return than the savings from lower interest payments.

• Affordability: Mortgage companies that issue prime loans have tougher restrictions for obtaining mortgages of any size. Factors they are likely to consider are monthly income, capital savings, credit history and asset values. Typically, mortgage companies base mortgage loan calculations on the 29% rule where the 29% of one's pre-tax income is used to assess how much loan a buyer can take on.

Property related concerns

In addition to personal and financial considerations, there is another relevant element to the mortgage 

buying process. Specifically, the property itself is a factor because small properties are not always cheap or a good investment. A few matters relating to the property itself are as follows:

• Location: If the small property is located in a high-priced area of downtown New York, or London, it is not likely to be cheap. Thus a small property mortgage does not always equate to an affordable mortgage.

• Condition: Older homes tend to have greater potential for costly restoration and repair making a small mortgage less practical. Even thought the mortgage may be small in such an instance, the cost of maintaining the home may not.

• Insurance Costs: Insurance costs such as hazard insurance can add a nice chunk of cash to a monthly mortgage payment. If one lives in an area or region prone to natural disaster, the cost of insurance will likely increase the cost of the small property mortgage.

Small property mortgages are not that different from large property mortgages. They may be more manageable if certain conditions such as location, age of home and insurance costs don't inflate the actual cost of the mortgage. Before obtaining a small mortgage loan it may be a good idea to ponder some of the information and tips contained in this article. Doing so may better prepare one for the potential hidden costs, living consideration and utilization of financial strategies.