The appraisal determines the value of your home and your loan amount. Without it, lenders would be unable to know how much to safely lend you. But, there are exceptions. Certain loan programs don’t require the value of your home. If they do, they use the original value used when you purchased the home. Here we look at these loans and who can use them.
FHA Streamline Refinance
FHA borrowers have the benefit of a simple refinance program. It’s called the FHA Streamline Refinance. As the name suggests, you don’t need very much to qualify for the loan. What you must have is an FHA loan that is current. Beyond that, you don’t need very much, including no appraisal. Here’s how it works:
You find a lender. You don’t have to use your current lender. Any FHA approved bank is acceptable. This lender will confirm that you have an FHA loan. If you have your case number, it simplifies the process. The lender then determines if you are current on your FHA loan. You can’t have more than 1 late payment in the last 12 months. If you do have a late payment, it can’t be more than 30 days late. You must also prove there is a benefit to the refinance. The benefit is usually that you have a lower payment and save money.
Beyond that, the FHA doesn’t require very much. The lender can use the original value of your home. You don’t have to provide paystubs or tax returns. You may have to provide your employer’s information. This allows the lender to verify you work there. Most lenders don’t verify your income, though.
The FHA restricts your loan amount to a specific amount. It’s your outstanding principal balance plus any mortgage insurance you owe. The upfront mortgage insurance fee is the same as it was when you took out your original FHA loan. But, if you refinance within the first 3 years, you get a prorated refund of the amount you paid. The lender deducts this amount from your new upfront MIP. The total equals your maximum loan amount. You can’t take any extra cash out of the equity of your home with this program.
VA IRRRL Program
The VA has a similar program. It’s called the Interest Rate Reduction Refinance program. It allows you to refinance your loan for a better term, rate, or lower payment. It’s the same principal – you need a benefit in order to refinance under this program. Under no circumstances can you take cash out of the equity of the home. The program is strictly to help you make your payments more affordable. The VA approves these loans because they provide borrowers with more disposable income.
The VA requires pretty much the same items the FHA requires:
- Proof you currently have a VA loan
- Proof of timely payments over the last 12 months
- Contact information for your employer
- Proof you lived in the property as your owner occupied residence up until that date
The VA also restricts the loan amount to the outstanding principal balance and the new funding fee. The VA charges only 0.5% when you use the VA IRRRL program. The VA also allows borrowers to wrap in any closing costs they don’t want to pay out of pocket.
USDA Streamline Refinance
The final government program that allows a refinance with no appraisal is the USDA streamline refinance. This program started as a pilot program. Only certain states had access to it. Today, it’s available throughout the country. In order to qualify, you must meet the following requirements:
- Prove you live in the property as your primary residence
- Have a current USDA loan
- Prove timely payments of your USDA loan
- Prove the refinance saves you money (at least $50 per month)
Just like the other programs, lenders don’t verify your credit score or income. They also use the original value of your home.
The Benefit of No Appraisal
It sounds risky for lenders to refinance loans with no appraisal. What if the value dropped? It might have and in fact, some borrowers may be underwater on their homes. Because you prove you can pay the current mortgage, though, it pays to refinance them without knowing the current value. The lower payment makes the mortgage more affordable. This lowers your risk of default. Underwater borrowers often don’t have an incentive to stay in the home. If the payments become unaffordable, they could just walk away from the home. This is expensive for banks, which is why they offer this program.
If you are underwater, the streamline programs offer you an immense benefit. You can save more money each month. If you can afford it, you could put that save money towards the principal of the home. This way you pay the principal down faster and gain some of your equity back.
None of these things happen overnight, but they are a helpful way to get you back in the swing of things. Not needing an appraisal is a great benefit for you and the banks. A foreclosure can damage your credit score for many years. Most programs require borrowers to wait between 2 and 3 years before they can apply for a new mortgage. This means you may end up renting for many years to come.
Take advantage of the streamline programs available and secure a refinance with no appraisal. You’ll save time and money in the long run. You’ll also end up with a more affordable mortgage to help you get ahead on your real estate investment.