How to Refinance Your Fannie Mae Home Loan
Fannie Mae recently announced that there will be a new refinance loan called the high loan-to-value (LTV) refinance option. This new option replaces the DU Refi Plus and the Home Affordable Refinance Program, ending on December 31, 2018. As with the original option, refinancing is meant to help borrowers change their mortgage based on their financial goals. For many, refinancing allows them to lower the loan term and their interest rate.
While some borrowers believe a Fannie Mae refinance plan is simple to coordinate, it takes a lot of pre-planning. Borrowers must gather documentation, present it to Fannie Mae-approved lenders and determine what the new terms of their refinanced loan will be. For more information on high LTV refinance options, review the sections below.
What is the difference between Fannie Mae loan modifications and refinance loans?
Many homeowners are unfamiliar with the difference between the modifications and the Fannie Mae refinance option. While they both entail revisiting your loan, the outcome is widely different. A Fannie Mae loan modification is a process through which homeowners adjust the terms of their current loans. To qualify, applicants must generally show financial or personal hardship. Homeowners who are close to losing their homes typically modify their loans. However, with loan to value mortgage refinance, eligible applicants purchase entirely new loans. The biggest benefit of refinancing is the ability to shorter your loan terms, which results in paying the mortgage off more quickly. Refinance may also allow applicants to change the type of loan they have and potentially lower their interest rates.
Why should you purchase a Fannie Mae refinance loan?
Loan to value mortgage refinance loans from Fannie Mae can benefit homeowners in several ways. Many homeowners refinance their loans to get lower interest rates, which can equal lower payments. Fannie Mae requires that refinance options must benefit borrowers by:
- Reducing their monthly principals and interest (P&I) payments. The principal is the total cost of the loan without interest.
- Offering a lower interest rate.
Download our guide for more information on how lenders must benefit borrowers through the Fannie Mae refinance loan.
What should you do before purchasing a Fannie Mae refinance loan?
Before contacting your lender, you should first make sure you meet the eligibility requirements for the Fannie Mae high LTV refinance option. The first requirement is that borrowers must already have a Fannie Mae mortgage to qualify for their refinance option. This means that if you obtained your original loan through a non-Fannie Mae lender, you are not eligible for refinancing through the government-sponsored enterprise. In addition, borrowers cannot have recent delinquencies on their records or any past due mortgage balances.
Moreover, applicants looking to get a Fannie Mae loan-to-value refinance option must not have previously refinanced through the Fannie Mae Desktop Underwriter (DU) Refi Plus or Refi Plus. Those refinance options will no longer be available after 2018. However, the new Fannie Mae refinance loan is different. Borrowers can refinance through Fannie Mae multiple times. However, they must meet all other requirements. Additional qualifications regarding LTV ratios are as follows:
- For principal residences with one to four units, the minimum loan-to-value ratio range between 75.01 percent and 97.01 percent.
- The minimum LTV ratio for second homes with single units ranges between 85.01 and 95.01 percent.
- For single to four-unit investment properties, the ratio is between 70.01 and 80 percent.
For specific figures regarding the Fannie Mae high loan to value ratios and a full list of the eligibility requirements, download our guide.
What is the Fannie Mae refinance process?
The process to obtain a high LTV mortgage refinance option through Fannie Mae starts with shopping online for current rates. Mortgage rates can change from one day to the next. As such, homeowners must conduct extensive research online to find rates that works with their budgets. Every day, Fannie Mae-approved lenders advertise their interest rates online. Once you find one that works within your budget, you should contact the lender as soon as possible.
One of the most beneficial steps to take once you find a low interest rate is asking for a mortgage rate lock. For a fee, lenders commit to keeping the same interest rate they advertised. This means that if rates go up or down, yours will stay the same. Some Fannie Mae lenders offer a one-time float down option in which applicants can receive a lower interest rate if it is available.
Once the Fannie Mae refinance application process begins, lenders will request a lot of documentation. This includes proof of income, employment records and assets. There may also be an appraisal on the property to assess its current value. All of these details will help lenders draft a refinancing option that meets your needs. The entire process can take a few weeks. However, during this time, you will likely be in communication with the lender often.
What are the benefits and drawbacks of a high loan to value refinancing option?
The main benefit of the Fannie Mae loan to value refinance option is the ability to reduce your interest rate and lower your monthly payments. For many homeowners, the monthly payments can put a big strain on their finances. Refinancing can be an effective way of relieving some of those financial constraints. Unlike many other lenders, Fannie Mae-approved lenders have a simple underwriting process that does not require too many documents. Although there are some eligibility requirements, Fannie Mae has simplified the documentation process.
While high loan to value refinancing is a great option for many homeowners, it does come with certain disadvantages that you should be aware of. One of the biggest drawbacks of Fannie Mae refinancing is the cost of fees. The closing costs are usually between 1 and 2 percent of the loan amount. Depending on the new loan amount, that can cost homeowners at least $4,000. With this in mind, it is imperative that homeowners compare the overall savings from refinancing to the costs of closing. If the latter is higher, the high LTV refinancing option may not be a good idea.
What is Fannie Mae?
The Federal National Mortgage Association (Fannie Mae) provides affordable housing finance options for homebuyers and renters. Fannie Mae does not provide original mortgages. Rather, the organization purchases existing mortgages and guarantees them with government sponsorship. Fannie Mae mortgages have a fixed rate and can have a lifespan as long as 30 years.
Who is eligible for Fannie Mae?
Fannie Mae guarantees multi-family and single-family mortgages and loans. To qualify for either type of loan, an applicant must have an income lower than the local average, and the property he or she wants to buy must be worth less than the federal maximum. Further, applicants must have a credit score above 620. However, the minimum required credit score may change depending on how many properties the applicant plans to purchase.