There’s a secret surrounding your government-backed loan that you may not know. You can refinance with without paying for an appraisal. Even better – you can get this new loan even if you are upside down on your current loan!
It sounds crazy, but it’s possible with a few simple steps. As long as you make your mortgage payments on time, chances are you are eligible for this program. This pertains to FHA, VA, and USDA loans.
The Streamline Refinance Program
Each of the three government-backed loans offers a program they call the ‘streamline refinance.’ It allows you to secure a lower interest rate, lower term, or change from an ARM to a fixed rate with very little verification.
For starters, the lender does not have to worry about the value of your home. The lender can use the original value used when you purchased the home. The lender also does not have to verify your income, assets, or even your credit score.
So what do they have to verify? There has to be a catch, right? It all comes down to your mortgage payment history. In most cases, you must have made your last 12 payments on time. Even one 30-day late can make you ineligible for the program.
Here’s why these government-backed programs allow this crazy scenario:
You must have a net tangible benefit. In other words, you must benefit from the refinance. Usually, this means a lower payment. This results from a lower interest rate in most cases.
The FHA, VA, and USDA also consider a lower term and/or refinancing from an ARM to a fixed rate a benefit, though. In these cases, your payment may increase slightly, but it still counts. Just make sure the payment does not increase more than 20%. If it does, then you’ll be back to verifying your qualifying factors to get the loan.
The Benefits of Refinancing a Government-Backed Loan With no Appraisal
The main benefit is obvious – you don’t need an appraisal! This could save you several hundred dollars. However, it could also help you get the approval you need. If your home depreciated, chances are you would not get a new loan. You might even owe more than your home is worth and still get the loan – it’s hard to beat that benefit!
Other benefits you may realize from the streamline programs include:
- No maximum LTV – Usually when you refinance, there is a maximum LTV you must meet, which ties into your appraised value. Since you don’t need to verify your appraised value, there is no maximum LTV.
- No maximum DTI – Because you don’t have to verify your income, there isn’t a debt-to-income ratio you must meet either. As long as you have a timely payment history, you are eligible.
- Lower interest rate – Usually, in order to qualify, you must secure a lower interest rate. This means you save money monthly as well as over the life of the loan.
How Much You Can Refinance
Here’s where the tough guidelines come into play, though. You cannot just take out as much of a loan as you want. You are restricted to the outstanding principal balance of your current loan plus any closing costs or allowed fees.
For example, if you currently have $200,000 outstanding on your FHA loan and you want to use the streamline program, you can only take out $200,000 plus any closing costs or funding fees you want to roll into the amount.
Because you don’t verify your income or your home’s value, the lender must restrict your loan amount to what is already outstanding. The point of the loan is to help you save money or lower the risk of your loan (ARM to fixed rate) in order to lower your risk of default.
Lenders don’t have to ask for any verifications if you have a timely payment history because your loan payment should decrease. If you prove you could make your higher payments on time, the lender has every reason to believe you can make the lower payments on time too.
If you qualify for a government-backed loan with no appraisal and there is a benefit for it, it can be a great option. You’ll get a lower payment and pay off your mortgage faster. This is especially helpful if the home values in your area are having a hard time picking back up after the recession. As always, make sure you shop around to find the lowest rate and closing fees to further the benefit of this loan.