Federal Housing Administration mortgage insurance programs have a long history of assisting low- and moderate income borrowers and those with credit challenges. FHA-insured loans offer flexible underwriting guidelines compared to conventional loans and may be used to purchase a home or refinance an existing loan. FHA offers a competitive maximum loan-to-value ratio on its various refinance options.
An FHA refinance involves paying off an existing conventional or FHA-insured mortgage with the proceeds from a new FHA loan. The government agency will insure three types of refinances: streamline, no cash-out (rate and term) and cash-out refinance. FHA offers a limited-time refinance option for struggling homeowners owing more on their home than it is worth. The FHA short refinance option begins September 2010 and is scheduled to end December 31, 2012. The maximum LTV represents the highest loan amount FHA insures in relation to the property's appraised value. The LTV ratio is expressed as a percentage and is based on the primary mortgage only. The max LTV varies by refinance type. A one-time Up Front Mortgage Insurance Premium of 2.25 percent is charged on each FHA refinance.
A streamline refinance involves minimal underwriting and is designed to lower the borrower's principal and interest payment. Only available to existing FHA-insured mortgage borrowers, the streamline maximum LTV is 97.75 percent. The streamline may be completed with or without an appraisal. With an appraisal, the loan amount may not exceed the lesser of the following two calculations: 97.75 percent of the appraised value plus the new up-front mortgage insurance premium, or the sum of the existing principal balance and the UFMIP. Without an appraisal, the loan amount may not exceed the outstanding principal balance minus the applicable UFMIP refund plus the new UFMIP charged on the refinance, according to FHA Outreach.
Rate and Term
The rate and term refinance is designed to change the interest rate and/or the loan repayment term. Borrowers may refinance an existing FHA loan or conventional. The maximum LTV is the lesser of 97.75 percent of the newly appraised value of the property or the existing debt, according to FHA Outreach. When the refinance involves an UFMIP that is financed into the new loan, the maximum LTV is 100 percent of the appraised value.
A cash-out refinance allows homeowners to access equity in their home to pay off existing debts and liens, keep the proceeds for future use, or a combination of these. The maximum LTV is 85 percent, as this refinance type presents increased risk to the lender.
FHA's temporary short refinance option requires participation by the lender of the existing conventional loan. The maximum LTV for borrowers with negative equity in their home is 97.75 percent. If a second mortgage (subordinate or junior lien) exists, including a Home Equity Line of Credit, the combined loan-to-value is 115 percent. A streamline refinance provides for a 125 percent CLTV. The rate and term and cash out do not allow increased CLTVs.
- Real Estate ABC: Glossary: Loan-to-Value (LTV)
- HUD: Refinances
- FHA Outreach: Maximum Insurable Mortgage Amount for Streamline Refinance With Appraisal (after 4/18/2011)
- FHA Outreach: Maximum Insurable Mortgage Calculation for Streamline Refinances with an Appraisal
- FHA Outreach: No Cash Out Refinance Transactions With an Appraisal
- FHA Outreach: Maximum LTV Factors, CLTV Ratios, and UFMIP for Various Types of Refinance Transactions
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.