The federal government is set to begin offering more mortgage refinance options for low-income borrowers beginning June 5, 2021.
The Federal Housing Finance Agency (FHFA), a regulator for the mortgage finance industry, announced earlier this year that in order to better serve those affected by the COVID-19 pandemic and economic downturn, it would begin offering a new mortgage refinance option to low-income borrowers who hold loans backed by Fannie Mae and Freddie Mac, the government-controlled mortgage giants backing about half of all mortgages in the U.S. The FHFA estimates this refinance option could save borrowers from $100 to $250 on their monthly payment.
Borrowers who are interested in seeing if they qualify for this refinance option and take advantage of today’s low interest rates can use an online marketplace like Credible to get in touch with a mortgage expert and get all their questions answered.
Who is eligible for the new FHFA mortgage refinance program?
Eligible homeowners could refinance their home loan and lower their interest rates as well as their monthly payments by an average of about $100 to $250 per month, according to the FHFA. But the regulator is requiring that lenders save borrowers at least $50 per month in order to use the refinance program.
The lenders who use this program must also upfront the costs of an appraiser up to $500 if the property is not eligible to be refinanced without a traditional appraisal. Fannie Mae and Freddie Mae will then later reimburse the mortgage lender for the appraisal costs.
With refinance rates at all-time lows, many borrowers who were not previously eligible for a mortgage refinance can now do so. This program loosens the standards to obtain a refinance. Below are some of the standards for low-income borrowers to obtain a refinance through the new program.
- Higher debt-to-income (DTI) ratio: The low-income refinance option allows for a DTI of 65%, up from the traditional DTI level for conventional loans of 43%. This means the total debt, including the home loan payment, personal loans, student loans, credit card payments, auto loans and other loan balances and debt, of a household can’t exceed 65% of its total income."Knowing that people’s incomes have come down, and if we bring their payment down their DTI will come down so it becomes a self-fufilling prophecy," said Vishal Garg, CEO and founder of Better.com, a mortgage lender that will be offering the new refinance product.
- Lower income standards: This low-income loan refinance product is only available for low-income borrowers. As such, the homeowner must have an income at or below 80% of the area median income.
- Missed payments: Unlike traditional mortgage refinances, the borrower can have one missed payment in their 12-month history. However, their six-month history must show all on-time payments.
- Other requirements: The homeowner must also have at least a 3% equity stake in the home, and their credit score can be as low as 620.
"Last year saw a spike in refinances, but more than 2 million low-income families did not take advantage of the record low mortgage rates by refinancing," FHFA Director Mark Calabria said when the program was announced. "This new refinance option is designed to help eligible borrowers who have not already refinanced save between $1,200 and $3,000 a year on their mortgage payment."
If you are ready to refinance and want to see if you are eligible, or to compare rates and see how much you could save, visit Credible to access multiple mortgage lenders at once.
How long will the refinance program be available?
No end date has been set for the refinance product, however, homeowners may have much less time than that to refinance their mortgage. That’s because as refinance rates go up, the benefits of refinancing drop.
"There’s a get-in-line quickly part of it, partially because interest rates keep going up," Garg said. "The markets could shut this off if the rates keep going up."
Garg estimates that the average loan amount for these refinances could hover around $150,000. For that amount, even just an increase of one percentage point to mortgage interest rates could cause monthly payments to rise by close to $100. Homeowners that wait could risk skipping out on low interest rates.
Garg said that this program has the potential to help hundreds of thousands, if not millions, of families to refinance their home loan.
Want to see how much you could save? Check out Credible’s online marketplace and use a mortgage refinance calculator to calculate your potential savings.
Low-income borrowers were left out of last year’s refinance surge as their income and credit history prevented them from benefitting from record-low mortgage interest rates. But now, the FHFA’s new refinance program could help thousands more saving on their mortgage.
To learn more about the program and today’s refinance options, visit Credible.
Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at firstname.lastname@example.org and your question might be answered by Credible in our Money Expert column.