June 18, 2015
We get many reader questions about FHA refinance loans. Some of those questions involve what the lender might do if the borrower has missed mortgage payments leading up to the refinance. The short answer to these types of questions is that it depends on the type of refinance loan in question and the reason for the loan.
All FHA refinance loans require the borrower to be current or to be brought current on the loan–that could mean in some foreclosure avoidance scenarios that the missed mortgage payments are added into the new loan amount. For borrowers who are not seeking foreclosure avoidance, but rather simply refinancing the property, there may be a 12 month seasoning period or mandatory waiting period which must elapse between the last missed payment and the new loan application.
FHA loan rules don’t permit the borrower to skip any mortgage payments. That means that if you anticipate getting approved for the refinance loan, you will be required to make the final payment on the old mortgage before the new loan closes–you can’t skip a month, this is not permitted.
FHA-to-FHA refinance loans may have different, less stringent requirements than conventional-to-FHA cash out loans, but the purpose of an FHA Streamline Refinance, for example, is different than an FHA cash-out refinance. That’s why you see Streamline loans that require no FHA-mandated appraisal or credit check; the purpose is to assist the borrower by offering a lower interest rate, monthly mortgage payment, or both.
A borrower who is not current on an FHA or conventional home loan at the time the loan is needed should discuss options with the loan officer. Is foreclosure avoidance the goal? You may find certain programs that allow qualified borrowers to catch up on those missed payments as described above by including them into the new loan. Foreclosure avoidance situations are given additional consideration because it’s in everyone’s best interest to stop the foreclosure from happening.
That said, FHA loan rules are designed specifically to prevent skipped payments from happening. Borrowers should take care to come to the refinance loan process with 12 months of on-time payments on all financial obligations, not just mortgage payments, for best results.
Do you have questions about FHA home loans? Ask us in the comments section.
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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