THE FHA VS. CONVENTIONAL REFINANCE

There are two primary types of mortgage loans for consumers to choose from today. Those two are loans that come with some sort of government-guarantee and ones that do not. Loans that do not have any government backing are called conventional loans underwritten to guidelines established by Fannie Mae and Freddie Mac. That�s the initial difference but when it�s time to refinance, there are some other differences as well and could very well impact your decision on which loan to take when first buying your home.

The FHA loan is a government backed mortgage program. Should the loan ever go into default and the original lender approved the loan using proper FHA guidelines, the lender is compensated for the loss. This compensation is financed by two mortgage insurance premiums that accompany each FHA mortgage, an upfront mortgage insurance premium that is rolled into the loan amount and an annual premium paid in monthly installments.

With a conventional loan, the lender who owns the loan does not have any government compensation should the loan go into default. Some loans with mortgage insurance do provide some relief but overall it�s the lender who takes on the entire risk.

When it�s time to refinance, either due to lower market rates, changing from a variable rate into a fixed or changing loan terms, there are some basic differences between FHA and conventional loans and it�s primarily due to the amount of documentation involved.

When refinancing an existing conventional loan, the entire approval process is completed. That means new W2 forms, pay check stubs, bank statements and credit check. There�s a new appraisal required, too. However, when refinancing an existing FHA loan into a new FHA loan, there is what is referred to as a �streamline� refinance which eliminates much of the paperwork originally required.

The FHA streamline refinance doesn�t need an appraisal. There are no pay check stubs needed nor are there W2s to dig up. No bank statements and no employment check. In short, very little documentation which streamlines the entire approval process is needed. If you have an existing FHA loan, the streamline is your better option. If you have a conventional loan, you�ll repeat the entire process you encountered when you first obtained financing.

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