Refinancing with low income? Refi Possible could help
Refinancing a mortgage can be expensive, especially when you consider the upfront closing costs involved.
But a new program aims to make the refinance process more affordable.
Freddie Mac’s Refi Possible allows you to take advantage of lower mortgage interest rates and reduces the upfront cost to refinance.
If you make low- to moderate-income and your current mortgage is backed by Freddie Mac, you might be eligible.
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What is Refi Possible?
Freddie Mac recently introduced a mortgage program it calls Refi Possible.
The new loan is intended to help lower-income mortgage borrowers pay less for a refinance and take advantage of current low interest rates.
“A lot of people have been struggling during the pandemic. Many yearn to refinance but worry that they won’t be able to lower their interest rate or pay for refinancing closing costs,” says Mayer Dallal, managing director for California-based mortgage lender MBANC.
“This program is designed to help homeowners who would otherwise be thwarted by the high upfront costs involved with a refi,” Dallal continues. “If you qualify, you can lower both your monthly payment and your interest rate.”
Benefits of the Freddie Mac Refi Possible program
The Refi Possible program offers big benefits for eligible borrowers.
You could decrease your interest rate, pay less in mortgage expenses every month, and potentially pay nothing for an appraisal (if the lender requires one). This could save you a few hundred dollars upfront.
With a Refi Possible refinance, you can count on lower monthly mortgage payments because your interest rate is guaranteed to be reduced by at least 50 basis points (0.5%).
Say, for instance, your current interest rate is 3.75% and you are eligible for Refi Possible. If so, your new interest rate would be 3.25% or even lower.
Additionally, if your transaction requires a new appraisal, the cost will be covered. That’s because an appraisal credit will be given to your lender and passed on to you when your new loan is purchased.
Brett Bivenour, chief technology officer at FasterFi in Melville, New York, says “a good candidate” for the Refi Possible refinance is a borrower who has:
- A mortgage loan balance at or below $600,000
- A credit score of 620 or higher
- And wants to create more financial and savings opportunities
By reducing your monthly housing cost, Refi Possible can free up more of your budget to pay off debts, invest in retirement funds and other savings accounts, and cover day-to-day expenses.
How the Refi Possible program works
If you’re interested in the Refi Possible program, there are a few steps you should take to verify your eligibility.
First, you must confirm that Freddie Mac owns or securitizes your current loan. Use Freddie Mac’s handy Mortgage Loan Lookup Tool to verify.
Next, you need to use Freddie Mac’s Income and Property Eligibility Tool to determine that you meet your area’s median income limits and your home qualifies.
Fortunately, Freddie Mac recently expanded its Refi Possible program to include those earning at or below 100% of their area’s median income, up from the previous limit of 80%.
That means more homeowners are now eligible and you don’t need an ultra-low income to qualify.
Finally, you’ll want to contact your current lender or mortgage servicer.
Be aware that Freddie Mac doesn’t provide loans directly to consumers. So you’ll need to execute the Refi Possible refinance with your existing lender; or, if it doesn’t participate in this program, choose a participating lender.
Requirements to qualify for Refi Possible
Note that there are several qualification requirements to get a Refi Possible refinance loan. You must:
- Have a Freddie Mac-owned conventional mortgage loan
- Own a single-family home used as your primary residence
- Earn income below the applicable limit, which is currently 100% of your area’s median income (AMI)
- Have a current credit score of at least 620
- Have no missed mortgage payments over the past six months, and no more than one missed payment in the past 12 months
- Have a loan-to-value ratio of 97% or less
- Have a debt-to-income ratio of 65% or less
Dallal cautions that you aren’t allowed to remove or add any borrowers to your refinance loan, either. In addition, no vacation properties or second homes qualify for the program.
Thankfully, Freddie Mac has recently made it easier to be eligible for a Refi Possible loan.
The agency nixed its maximum loan seasoning requirement of 10 years and eliminated the $5,000 cap on the financing of closing costs, prepaid items, and points.
Also, you are no longer required to reduce your monthly mortgage payments by at least $50 — any reduction amount is now allowed.
Freddie Mac Refi Possible drawbacks
One disadvantage with Refi Possible is that you aren’t allowed to do a cash-out refinance with this program. The maximum cash you can take out at closing is $250.
Of course, the biggest caveat is that your mortgage loan must be backed by Freddie Mac.
So if you have a Fannie Mae-backed loan or an FHA, VA, or USDA mortgage loan, you won’t qualify for Refi Possible.
Luckily, there are plenty of other refinance options worth pursuing if Freddie Mac’s Refi Possible isn’t the right fit.
Alternative low-income refinance options
If you’re not eligible for Freddie Mac’s low-income refinance loan, don’t panic: There are alternative options you may be able to pursue, including:
- Fannie Mae RefiNow — Does Fannie Mae own or securitize your mortgage loan? You may be able to get a RefiNow refinance, which boasts similar benefits and has some of the same eligibility requirements as a Refi Possible refinance
- Streamline refinance or IRRRL — Do you currently have a VA loan or FHA home loan? Consider, respectively, an interest rate reduction refinance loan (IRRRL) or FHA Streamline Refinance. Both programs involve less red tape when it comes to underwriting and borrower credit documentation. This allows the refi process to progress more speedily (closing costs may still apply, however)
- Standard conventional refinance — If you have a non-government-backed loan, a conventional refinance may be able to lower your rate and charge lower costs with greater flexibility than other refinance options
- Loan modification — Perhaps you’ve experienced a loss of income and aren’t eligible for a standard refinance. In this instance, you might want to consider a mortgage loan modification. Here, your lender agrees to alter the terms of your mortgage in order to avoid default and decrease your monthly payments. A loan modification won’t replace your current mortgage loan or your lender, but it will restructure your loan to make it more manageable when you are struggling to make your mortgage payments
Is Refi Possible worth it?
Assuming you’re eligible, refinancing via Refi Possible can be a wise strategy to decrease your interest rate and lower your monthly mortgage payments.
That can make a big difference in your personal finances over time.
“Borrowers whose income falls at or below the median for their area, who have a decent credit score, and whose payments have been on time for the past several months can access historically low rates without worrying about closing costs and other expenses eating into their savings,” explains Bivenour.
He adds that the savings you’ll see with a Refi Possible refinance can go a long way toward achieving other financial goals, such as saving for college, plumping up your retirement nest egg, and paying for home upgrades.
Lastly, remember that your chances of being eligible have likely increased, since Freddie Mac recently upped the area median income limit from 80% to 100%. That’s an added incentive to check your eligibility and see what you could save.