Can I refinance if my income has dropped?

Posted by  on Jun 06, 2012

Dear Liz,

I have a mortgage on my home that is at 6.5 percent and I would love to refinance it at today's mortgage rates and save some money. Unfortunately, I became disabled a couple of years ago and my disability checks are not enough for me to qualify for a mortgage refinance. Could a government housing agency help me?

Collin, Des Moines

Dear Collin,

Depending on your circumstances, you may have several options. Fannie Mae, Freddie Mac, and FHA all offer refinance programs with more flexible guidelines for people with loans already on their books. Here are the programs:

FHA Streamlined Refinance

If you are lucky enough to have an FHA loan, refinancing it is easy. You can do a streamline refinance with no income or credit qualification, subject to these rules:

  • You cannot get cash back except for minor adjustments at closing, not to exceed $250.
  • An appraisal is not required if your credit is good enough to qualify.
  • If you do a refinance without appraisal, the maximum term is the lesser of 30 years or the remaining term of the mortgage plus 12 years. If you get an appraisal you can get a 30-year loan.
  • Credit qualification is not required if you refinance with an appraisal.

Fannie Mae Refi Plus

If you have a Fannie Mae loan, you do have to qualify (most likely through Fannie Mae's Desktop Underwriter system) but guidelines are more flexible:

  • If your debt-to-income ratio is too excessive to qualify for a home refinance through ordinary automated underwriting, your application is allowed to be manually underwritten as long as you go to the same lender that is currently servicing your mortgage.
  • You are allowed to add a co-signor to improve your income.
  • Per Fannie Mae: "For Refi Plus (manually underwritten), the lender is not required to verify or document assets and may rely on the information stated by the borrower on the new mortgage loan application. Fannie Mae's quality assurance process will not hold the lender responsible for information obtained as a result of its reverification of assets or reserves stated by the borrower or impose any maximum debt-to-income ratio or other underwriting criteria in connection with a Refi Plus loan."

Freddie Mac

If you have a Freddie Mac loan, you must hurry! Streamline refinance program terminates in May.

  • To be eligible, your mortgage must be current for the most recent 90 days and cannot have been 30 days delinquent more than once in the most recent 12 months.
  • The refi must be manually underwritten.
  • Minimum Credit Score is 620.
  • Verification of income and employment is not required.

You may also be eligible for a lower mortgage rate through Making Home Affordable, which is the Obama Administration's effort to help homeowners avoid foreclosure. You have a hardship, and if your payment is greater than 31 percent of your income you may qualify for a mortgage rate reduction. In any event, your first call should be to your mortgage servicer (the company that processes your loan payments) and avoid any company that claims it can get your a mortgage modification (for a hefty upfront fee of course). Your servicer is your most likely source of help.



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