New Mortgage Refinance Option for Low-Income Families

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If you own a home, there's a new government-backed program that might help you benefit from record low mortgage rates. The Federal Housing Finance Agency (FHFA) announced that Fannie Mae and Freddie Mac will offer a new refinancing option for low-income homeowners starting this summer. If you're eligible, you could get a reduced interest rate and a lower monthly payment.

The new refinance option, known as "enterprise-backed mortgages," will be offered through Fannie Mae and Freddie Mac (the "enterprises"). Fannie Mae and Freddie Mac are both government-controlled home mortgage companies created by the U.S. Congress to help support the mortgage market. The new offering's aim is to help level the mortgage playing field by making it easier for low-income homeowners to afford and benefit from refinancing. Not only would it reduce payments and interest rates, but it would also waive the adverse market refinance fee Fannie and Freddie recently began charging to make up for pandemic-related losses. Additionally, the new option encourages lenders to serve low-income homeowners by providing incentives like lender credits.

Here's all you need to know about the new refinancing program to help you decide if it's a good option for you.

Is Now a Good Time to Refinance?

The recent trend of low interest rates suggests it could be a good idea to consider refinancing. Normally when the economy is healthy and unemployment rates are low, interest rates—the cost of borrowing money—rise because people feel more confident about borrowing to buy things they want (like a house). During uncertain economic times, however, rates usually fall because people are more cautious about taking on debt; in those cases, the U.S. government (through the Federal Reserve) and lenders try to make borrowing more attractive and less expensive, hence the lower interest rates during the pandemic.

The FHFA notes that people who benefit from the new program would save at least $50 per month on their mortgage payment, but they anticipate homeowners saving closer to an average of $100 to $250 a month. These numbers might not seem like much at face value, but an extra $1,000 to $3,000 per year could be the difference between having a solid emergency fund and not having a financial cushion at all.

The benefits of refinancing seem clear, but recent data shows many homeowners who could benefit from refinancing haven't taken advantage of that option. A study done by Freddie Mac revealed that between February and June of 2020, high-income households saved significantly more on refinancing than those with lower incomes when compared with previously popular refinancing periods.

"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," Mark Calabria, director of the Federal Housing Finance Agency, said in a statement.

Part of the reason some people don't pursue mortgage refinancing is because the process can get expensive: The FHFA's new program is intended to help offset some of the costs that come up. For example, it can provide a credit worth up to $500 for an appraisal, which is usually paid out of pocket by the homeowner.

It's also important to note that this new refinancing program does not permit cash-out refinances. A cash-out refinance allows you to tap part of the home's equity, which in turn frees up cash. If this is the type of loan you're looking for, you'll need to look outside the program.

How to Qualify for an Enterprise Refinance Loan

If you're interested in applying, there are some basic things to know. First, Freddie Mac and Fannie Mae have different names for the program. Freddie calls its enterprise-backed mortgages "Refi Possible"; Fannie's name for the same program is "RefiNow".

Second, you'll need to find out if your specific mortgage is backed by Fannie Mae or Freddie Mac. For Fannie Mae, you can search for your loan on their website; for Freddie Mac, you can use the loan lookup tool on their site.

Third, to be eligible for the programs you'll need to meet a few different requirements:

  • You must have a FICO credit score of at least 620.
  • You need to earn at or below 80% of your area's median income.
  • You'll need to provide proof that you've been current on mortgage payments for the past six months in a row.
  • You haven't missed more than one mortgage payment in the past 12 months.
  • Have a maximum mortgage loan-to-value (LTV) ratio of 95% or 97% depending on the property type.
  • Your debt-to-income (DTI) ratio must be 65% or lower.

Prepare for an Enterprise Finance Loan

If you think an enterprise-backed mortgage refinance might be a good option for you, you'll need to follow much of the same process you would for applying for a traditional mortgage refinance:

  • Get prepared by understanding why you're refinancing: Is it to reduce your monthly payment? Lower your interest rate?
  • Check your credit to see if you can qualify. If your score is too low, take action to improve your credit score.
  • Check interest rates and compare lenders' rates to determine whether a refinance will make sense for you.
  • Find a lender you're comfortable with and let them know you're interested in the programs. Applications for Fannie Mae's RefiNow open in June 2021; Freddie Mac's ReFi Possible won't start accepting applications until late August 2021.
  • Apply for the loan, and enjoy your new low rate or monthly payment.

The Bottom Line

The new enterprise refinance loans could be an opportunity to save money on your mortgage and get some much needed financial relief. While you wait for these opportunities to open up, this could be a perfect time to find out which type of mortgage you have, check your credit and work on getting important information together for your applications.