How Do Government Refinance Programs Work?

Government refinance programs are backed by government agencies and typically have easier qualifying requirements than conventional loans. In some cases, you may be able to replace your existing mortgage with a lower-rate loan that doesn’t require credit underwriting or a home appraisal.

Understanding how government refinance programs work may save you time and money on your refinance without as much paperwork, as long as you’re eligible.

3 types of government refinance programs

You’ll find a variety of refinance options with three government entities — the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA).

FHA refinance loans

There are three types of FHA refinance loans: the FHA streamline refinance, the FHA rate-and-term refinance and the FHA cash-out refinance. FHA loans allow credit scores lower than any other government refinance program — down to 500 if you refinance up to 90% of your home’s value, or 580 if you borrow more than 90%.

FHA streamline refinance. If you currently have an FHA loan, you might be eligible for an FHA streamline refinance without providing income documentation or paying for a home appraisal. You’ll need to budget for closing costs, including FHA mortgage insurance, and the process is usually faster than a regular refinance.

FHA rate-and-term refinance. You can refinance up to 97.75% of your home’s value with the rate-and-term option on this government program, and roll the costs into your loan. You’ll need to document your income and credit, and an appraisal is required.

FHA cash-out refinance. Borrowers who need to borrow more than they currently owe and pocket the difference in cash can choose an FHA cash-out refinance. This type of refinance allows you to borrow up to 80% of your home’s value.

VA refinance loans

Military servicemembers, veterans and eligible surviving spouses can choose from a variety of refinance loans that allow them to borrow more equity than other government refinance programs. Although no mortgage insurance is required, all VA refinance loans require a VA funding fee, unless you’re exempt due to a service-related injury.

The most common VA refinance programs are the VA interest rate reduction refinance loan (IRRRL), the VA rate-and-term refinance and the VA cash-out refinance.

VA IRRRL. This program is exclusively for homeowners with a current VA loan, and is also called a VA streamline refinance. You can lower your payment without a home appraisal, income paperwork or credit underwriting. However, unlike the FHA streamline refinance, closing costs can be rolled into your loan.

VA rate-and-term refinance. Military homeowners can borrow up to 100% of their home’s value and roll the closing costs into the loan. A VA appraisal is required, and borrowers must go through a full credit and income review.

VA cash-out refinance. The VA cash-out refinance option allows eligible VA homeowners to borrow as much as 90% of their home’s value, which is 10% more than you can borrow with an FHA or conventional cash-out refinance.

USDA refinance loans

The USDA backs loans to help low- and moderate-income borrowers to purchase or refinance homes in USDA-designated “rural” areas. A down payment typically isn’t required and homeowners with current USDA loans may be eligible for streamline refinance programs similar to those offered by the FHA and VA.

USDA streamline refinance. Rural homeowners can take advantage of this low-income government refinance program if they currently have a USDA loan. The USDA’s streamlined assist refinance allows borrowers to replace their current USDA loan with no debt-to-income (DTI) ratio calculations or home inspection requirements.

USDA rate-and-term refinance. The USDA also offers a regular rate-and-term refinance option to replace a current USDA loan with a new one up to 100% of their home’s value, as long as you can qualify based on your income and pay for a home appraisal.

USDA cash-out refinance. The USDA doesn’t offer any cash-out refinance options.

HARP replacement programs

The Home Affordable Refinance Program (HARP) was created in early 2009 by the Federal Housing Finance Agency (FHFA) and U.S. Department of Treasury to help homeowners with conventional loans refinance their underwater homes (meaning their home value was lower than their loan balance). The program isn’t backed by any government agency like the programs above, and is exclusive to homeowners with Fannie Mae- and Freddie Mac-backed mortgages.

HARP ended in 2018, but several HARP replacement programs were created to help future underwater homeowners.

Fannie Mae High LTV Refinance Option (HIRO)

Fannie Mae’s High LTV Refinance Option (HIRO) is a program that caters to borrowers with Fannie Mae-owned loans. LTV stands for loan-to-value ratio, which is the percentage of a home’s value that is financed through a mortgage. To qualify for this program, at least 15 months must have passed since you took out the loan you’re refinancing, and you must have a minimum 97.01% LTV ratio (in other words, little to no equity).

Fannie Mae RefiNow™

This relatively new Fannie Mae refinance program allows you to replace your current Fannie Mae mortgage up to 97% of your home’s value with no minimum credit score required and a DTI ratio as high as 65% (the standard maximum is 50%). The RefiNow program sets income limits and requires an appraisal in most cases. Some borrowers may be eligible for an appraisal waiver or a $500 credit toward the appraisal cost at closing.

Freddie Mac Enhanced Relief Refinance® Mortgage (FMERR)

Freddie Mac’s Enhanced Relief Refinance Mortgage is exclusive to homeowners with a conventional loan owned by Freddie Mac. Similar to Fannie’s HIRO program, you’ll need a minimum 97.01% LTV ratio to qualify, and at least 15 months must have passed since you took out your current mortgage. You’re also only allowed one late payment over the last 12 months.

Freddie Mac Refi Possible℠

There’s not much difference between this program and the Fannie Mae RefiNow loan. The Refi Possible option allows you to borrow up to 97% of your home’s value with a DTI ratio as high as 65%, as long as your income is within the program limits. You’ll need to verify you currently have a Freddie Mac-serviced loan.

Pros and cons of government refinance programs

Pros

  You’ll be able to complete your refinance faster. With less documentation and a simpler underwriting process compared with traditional refinance requirements, you may close your loan and start saving money sooner.

  You won’t have to stress as much about your credit score. There are no credit score minimums with streamline refinance programs. However, you’ll want to maintain on-time mortgage payments to qualify.

  You won’t have to worry about your DTI ratio. The streamline refinance programs don’t require a review of your income or other credit for approval, so a higher DTI ratio due to a drop in income or more debt are less likely to hurt your chances of approval.

  You won’t have to pay for a home appraisal. A home appraisal may cost $300 to $500 or more. With a streamline government refinance program, you won’t have to worry about shouldering this cost, as appraisals typically aren’t required.

  You’ll qualify for cash-out with a lower credit score. Conventional lenders require at least a 620 credit score for most refinance options, much higher than the 500 minimum required by FHA cash-out refinance lenders.

Cons

  You may not qualify. If you’ve had several late mortgage payments recently or don’t have a current mortgage backed by the FHA, VA or USDA, you’re unlikely to qualify.

  You’ll pay closing costs. A mortgage refinance costs money. Whether you pay your closing costs out of pocket, roll them into your loan or take a higher mortgage rate, you’ll need to cover these expenses. With an FHA streamline, you’ll need to pay them out of pocket or accept a no-closing-cost refinance option — with a higher interest rate — so the lender can pay the costs on your behalf.

  You may not meet the net tangible financial benefit test. Unless your current mortgage rate is relatively high, the cost to refinance could outweigh your potential savings. Some programs, such as the VA IRRRL, set rules on your break-even point, which is how long it takes you to recoup your costs. If the costs are too high, the lender may deny your refinance request.

  You may end up with a higher-priced mortgage loan. A low credit score combined with the cost of FHA mortgage insurance may push you into higher-priced mortgage loan (HPML) territory. If that’s the case, the lender may require extra documentation to approve your refinance loan.

Other homeowner relief program options

• Forbearance. You may qualify for a mortgage forbearance, if you’re experiencing a temporary hardship like a job loss or income reduction. Your loan servicer may allow you to reduce or suspend your monthly mortgage payments for a set time period, such as six or 12 months. Once the forbearance period ends, you’ll negotiate a repayment plan for the missed payments.
• Modification. If you’re on the verge of falling behind or have missed one or several mortgage payments, your lender may offer you a mortgage modification. Options may include changing the original terms of your home loan, such as extending your repayment term or lowering your mortgage rate. Unlike a refinance loan, you keep your current loan; it’s simply modified to make your payments more affordable.