January 6, 2020
There are different refinance loans for different needs, and the FHA rate and term refinance option is available to help borrowers who aren’t looking for cash out at closing time.
The financial website Investopedia defines a rate-and-term refi loan as follows:
“The potential benefits of rate-and-term refinancing include securing a lower interest rate and a more favorable term on the mortgage, but the same principal balance will remain. Such refinancing could lower the homeowner’s monthly payments, or potentially set a new schedule to pay off the mortgage more quickly.”
The FHA Rate and Term refinance loan has different features and requirements than FHA cash-out refinancing or reverse mortgages. The rules that cover FHA rate and term refinancing are found in the FHA loan handbook, HUD 4000.1, and explains how this type of mortgage differs from the rest.
FHA Rate And Term Refinance Loans: How They Work
HUD 4000.1 defines an FHA rate and term refinance loan as follows:
“Rate and Term refers to a no cash-out refinance of any Mortgage in which all proceeds are used to pay existing mortgage liens on the subject Property and costs associated with the transaction.” There is no cash out on these refi loans.
Who Is Permitted to Apply
HUD 4000.1 rules include a requirement that “at least one Borrower” named on the original home loan as the title holder must be on the new loan. The rate-and-term refinance loan cannot be approved unless a titleholder is included in the transaction.
Eligible Property Types
FHA loan rules don’t mention all property types by name. However, HUD 4000.1 does contain a section with special requirements for manufactured housing:
“For a transaction involving a Manufactured Home to be considered a refinance, the Manufactured Home must have been permanently erected on a site for more than twelve months prior to case number assignment.”
There is one requirement listed for all property types:
“If the Mortgage to be insured is located in an area where a state, municipality, or other political subdivision has exercised eminent domain condemnation or seizure of a Mortgage, the Mortgagee must obtain a certification from the Borrower stating the Mortgage being refinanced was not subject to eminent domain condemnation or seizure.”
Payment History Rules
Your loan repayment habits will be important for this type of refinance loan. How long and how many payments you have made will be an important factor.
If you have had less than six months of payments, you’re required to have made all mortgage payments “within the month due”.
“For all mortgages on all properties with greater than six months history, the Borrower must have made all Mortgage Payments within the month due for the six months prior to case number assignment and have no more than one 30-Day late payment for the previous six months for all mortgages.”
Maximum Mortgage Loan Amounts
What is the maximum loan amount for an FHA rate-and-term refinance loan? That will depend on how long you have occupied the property.
Borrowers are generally eligible for “97.75 percent for Principal Residences” as long as the home has been owner-occupied for the previous 12 months, or “owner-occupied since acquisition if acquired within 12 months, at case number assignment”.
An 85 percent limit applies for those who have “occupied the subject Property as their Principal Residence for fewer than 12 months prior to the case number assignment date” and in cases where the home has been owned less than 12 months, but the borrower “has not occupied the Property for that entire period of ownership”.
Ask a loan officer if you aren’t sure how these rules may affect your home loan transaction.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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