One of the current major headline topics concerning mortgage refinance is revolving around the continued tightening by lenders. In fact, underwriting guidelines have become more restrictive by the month in 2008, including credit score qualification standards. The change to tougher lender guidelines is stemming from our national credit liquidity crisis and the continued decline in housing prices. With increased risk on the lender’s part, they are requiring a much cleaner loan application to fund loans.

What many people refinancing do not know, is that the squeeze in home loan qualifications are related to prime conventional home loans. FHA refinancing on the other hand, is a bit different, and guidelines are aimed to help as many homeowners refinance as possible. In years past, one could refinance into a decent interest rate with a 600 credit score and possibly finance 95 percent to 100 percent of their home’s appraised value. Those days are unfortunately gone for homeowners that can really benefit by a current refinance, if they choose to go the prime conventional route for their new mortgage. Fortunately, for many not qualified under a conventional mortgage, FHA refinance loans are filling the void.

An FHA refinance is not credit score driven, but there is a proverbial catch. Most lenders that underwrite and fund FHA refinance loans will require a 580 mid FICO score for eligibility purposes. Now, let’s be honest here, a 580 credit score is a pretty low score for the benefits of FHA refinancing. One of the many FHA loan benefits relate to the low refinance rates qualified for those with low credit scores. FHA interest rates are pretty much in line with equivalent mortgage rates offered to those with excellent credit scores. This is a huge advantage for those with poor credit. Another big benefit relates to how much a homeowner can finance, relative to the value of their home. Most FHA lenders will allow up to a 97 percent loan-to-value ratio. That means if your home is valued at $150,000, you can refinance up to $145,500 and still get low competitive refinance rates. In fact, many borrowers with great credit scores are going the FHA refinance route, as they are finding that interest rates are lower with an FHA loan as compared to the equivalent high loan-to-value conventional loan.

What’s more is that an FHA underwriter will listen to a borrower’s story relating to blips on their credit report. They will accept letters of explanation and supporting documentation aimed toward issuing a loan approval. In a day when is seems that numbers alone dictate a home loan approval or denial, it’s refreshing to see a refinance program that is more directed toward people and their needs.

By: Jim Bisnett