Do You Need a Rate And Term Refinance?

October 24, 2020

Borrowers with existing mortgages who wish to refinance have a variety of options for doing so under the FHA Single Family home loan program. You can refinance an existing FHA mortgage or a non-FHA mortgage using options like cash-out refinances, no cash out options, and there are additional choices including something known as a rate and term refinance.

The rules your lender must follow to issue FHA rate and term refinance loans are printed in  HUD 4000.1 (the FHA Lender’s Handbook), which defines an FHA rate and term refinance loan as refinance of any mortgage in which “all proceeds are used to pay existing mortgage liens on the subject Property and costs associated with the transaction."

Rate And Term loans feature no cash back to the borrower except for refunds on things paid up front but later financed into the loan. Refinancing a home using an FHA rate and term loan requires at least one borrower who was on the original title to be obligated on the new mortgage. You can’t have a rate and term refi approved without this requirement being fulfilled

Homes Eligible for an FHA Rate And Term Refinance Loan

The usual kinds of homes eligible for an FHA mortgage are eligible for this kind of FHA refinancing. That means that your home must be on an approved permanent foundation (see below) if it is a manufactured home or mobile home, and it also means that your home must pass an appraisal.

FHA loan rules do not list all eligible property types specifically by name, but there is a section in the rulebook that contains certain FHA requirements for manufactured housing. According to HUD 4000.1:

"For a transaction involving a Manufactured Home to be considered a refinance, the Manufactured Home must have been permanently erected on a site for more than twelve months prior to case number assignment."

And ALL property types must conform to the following rule from HUD 4000.1:

"If the Mortgage to be insured is located in an area where a state, municipality, or other political subdivision has exercised eminent domain condemnation or seizure of a Mortgage, the Mortgagee must obtain a certification from the Borrower stating the Mortgage being refinanced was not subject to eminent domain condemnation or seizure."

Payment History Is Important 

FHA loan rules vary when it comes to requirements for payment history--it all depends on how long you’ve owned the home at loan application time. What does this mean? If you have had less than six months of payments, you're required to have made all mortgage payments "within the month due".

HUD 4000.1 also states, "For all mortgages on all properties with greater than six months history, the Borrower must have made all Mortgage Payments within the month due for the six months prior to case number assignment and have no more than one 30-Day late payment for the previous six months for all mortgages."

Furthermore, "The Borrower must have made the payments for all Mortgages secured by the subject Property for the month prior to mortgage Disbursement."

If you cannot meet those requirements at the time you are considering your application, it’s best to wait until you CAN for best results.

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