FHA refi with no equity, damaged credit or debt

Q: Can I refinance my home with an FHA loan?

A: Yes, and you can do so even if you have little or no equity, a damaged credit score or higher debt than lenders usually accept. You may even be able to refinance with an FHA loan if you’re currently unemployed. Try that with conventional financing.

The Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development, doesn’t actually make loans.

It guarantees that private lenders will be repaid, even if you default. But you’ll pay for that guarantee in the form of up-front and monthly mortgage insurance.

With the government standing behind you, banks and mortgage companies can make loans they wouldn’t normally offer at competitive interest rates that could cut your monthly payments by hundreds of dollars.

You should know there are maximum loan limits for FHA loans. In 2015, you can borrow up to $271,050 for single-family homes in most places or up to $625,500 in high-cost cities like New York and San Francisco.

But your new loan may exceed these limits if it meets certain guidelines, especially if you’re refinancing an existing FHA loan or you took out your original loan when the upper limits were higher.

Q: How does refinancing into an FHA loan work?

A: There are two common options for refinancing your home with the FHA’s help.

Streamline refinancing is for borrowers who already have an FHA mortgage, regardless of how much home equity they have. An appraisal isn’t required.

This isn’t a foreclosure rescue program. If you’ve had your loan for less than 12 months, you must have made all payments within the month due.

If you’ve had the loan longer, you must have no more than one 30-days-late payment in the last 12 months and have made all payments within the month due for the last three months.

With a streamline refinance, since you already qualified when you took out your existing loan, the FHA doesn’t require you to qualify again. There’s no requirement for a credit check or income verification.

Lenders, however, may have stricter standards. If you know your only chance at qualifying is under the FHA’s minimum requirements, ask lenders about a non-credit-qualifying streamline refinance.

Rate-and-term refinancing is for borrowers who have a non-FHA loan and as little as 3.25 percent equity in their homes.

To obtain this financing, you’ll have to qualify for an FHA mortgage much as you would if you were buying a home.

You’ll find many of the financial requirements are less stringent than those for a non-FHA loan, but these things automatically disqualify you for an FHA loan:

n Chapter 7 bankruptcy within the last two years. You might qualify after one year if extenuating circumstances caused your bankruptcy, you have re-established good credit and the lender is amenable.

n Foreclosure within the last three years. If you can prove the foreclosure was caused by involuntary job loss or income reduction, and if your payment history has been good since then, the waiting period can be as little as one year.

n Delinquency on a federal debt like a student loan or income taxes.

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