A conventional refinance is any refinance loan that conforms to guidelines set by Fannie Mae or Freddie Mac. This type of refinance is available with as little as 5% equity, based on the current value. For a conventional refinance the lender requires an appraisal and documentation regarding the borrower’s income and assets. This program is different than the FHA and VA streamline refinance programs, where neither an appraisal nor income documentation is required.
A common question is whether a conventional streamline refinance program is available. Although technically there are no conventional streamline refinances, the HARP program comes close: most HARP loans waive the appraisal requirement, and lenders can accept reduced income documentation. For more information, see our HARP section below.
While a conventional refinance requires more documentation, it gives the borrower more options. Borrowers can refinance investment properties and second homes, and/or turn their equity into cash using a cash-out transaction. Start your conventional refinance simply be completing our online form.
One final consideration of conventional refinance loans is the Home Affordable Refinance Program (HARP). Sometimes, this loan is considered a conventional streamline program due to its easier qualification process.
Originally introduced in 2009, this program is designed to help homeowners with little or no equity in their property refinance into a lower rate, conventional loan.
For a detailed explanation of HARP and how you can qualify, see our HARP page.
Conventional refinance loans require equity, but many borrowers find themselves with no equity, or even negative equity (underwater). Without HARP, refinancing would be impossible.
When the HARP program was initiated, it allowed borrowers with a Fannie Mae or Freddie Mac loan to refinance despite their lack of equity. As of early 2014, over 3 million homeowners have refinanced with HARP. The government estimates that there are 12 million homeowners who could potentially benefit from this program.
Perhaps the most common conventional refinance loan program is the conventional rate and term refinance. “Rate and Term” simply describes the purpose of the refinance: to lower the interest rate or change the length of the loan term. Rate and Term refinances do not allow the borrower to take cash out.
Borrowers typically use this program when interest rates have fallen below the rate on their current mortgage. The lower rate reduces the borrower’s monthly payment and saves on interest over the life of the loan.
Shortening the loan term may increase monthly payments, but the loan would be paid off earlier. For example, if you’ve been paying on your 30 year loan for 3 years, you have 27 years left. By refinancing into a new 15 year loan, you shorten the time you will be making monthly payments by 12 years.
This type of refinance can also be used to change an adjustable rate mortgage to a fixed rate, ensuring that monthly payments will not rise in the future.
A conventional cash-out refinance is a mortgage where the borrower pulls out equity from the property in the form of cash. With the same refinance, the borrower can lower the rate or change the loan term length, if current interest rates allow. Typically, cash-out refinances are viewed as higher risk, and have higher interest rates associated with them.
Let’s look at how a cash-out refinance works. As an example, a borrower with a 5.00%* (5.04% APR) 30 year fixed rate loan for $200,000 wishes open a bigger loan of $250,000 because he needs some cash. Rates are such that he can also reduce his rate on another 30 year fixed to 4.00%* (4.03% APR).
In this example, let’s suppose closing costs are $3,000 and the money needed to pay off the existing loan is $200,000. The net cash to the borrower would be $47,000.
In order to accomplish this refinance, the borrower would need a new appraisal on the home, showing a value high enough to allow for the increased loan amount. If he wanted to avoid mortgage insurance, the home would have to appraise for $312,500 (80% of which is $250,000).
Cash out refinance loans can be opened on primary residences, second homes, and investment (rental) properties. For investment properties, more than 20% equity is typically needed.
Income for a conventional refinance is verified by providing two of your most recent paycheck stubs covering 30 days, two years’ of recent W2 forms, and a two year employment history. Two years’ tax returns may be required for self-employed borrowers. The borrowers can also expect to sign the IRS form 4506-T which allows the lender to pull tax return records directly from the IRS and compare them with the information provided by the borrower.
Proof of your assets will most likely be required. If you are required to pay any amount of money to close the loan, you will need to supply 60 days’ worth of checking, savings, or money market account statements. These are known as “liquid assets.”
You may also be required to supply non-liquid asset statements such as retirement or stock account statements. This is common when refinancing an investment property, since lenders require that you have money in reserve when getting this type of loan.
If you have enough equity, you are allowed to roll all closing costs into the new loan amount up to 90 percent of the current value of the property. This could eliminate out-of-pocket expenses.
Conventional refinance loans will require that a new appraisal be completed to determine current market value. The new value is used to establish a maximum loan amount available to the borrower. Appraisals typically cost between $350 and $550, although the cost can be much higher on high-end homes.
Contact one of our licensed mortgage experts if you have questions about your appraisal.
In addition, a new credit report will be reviewed. The required minimum credit score varies by lender, but typically a 660 score will help you qualify for most conventional refinance programs.
With the exception of HARP, conventional loans require private mortgage insurance (PMI) if the loan amount is higher than 80% of the property’s current value (Loan-To-Value of 80%+). Be sure to factor in this expense when you have less than 20% equity and considering a conventional refinance. The cost of PMI could be anywhere from $50 to well over $200, depending on loan-to-value and your credit score.
For 2014, conventional loan limits are at $417,000 for most areas. Some high-cost areas like Los Angeles, California have a loan limit of $625,500. If you are looking at a 2, 3, or 4-unit home, the loan limits are even higher. The standard loan limit for a 4-unit home is $801,950.
Another benefit of a conventional refinance loan is refinancing an FHA mortgage into a conventional one. This transaction can reduce the interest rate while removing the monthly mortgage insurance associated with FHA loans.
For instance, a borrower has an FHA loan with a 30 year fixed rate at 5.00 percent on a loan amount of $250,000 for a principal and interest payment of $1,342. This FHA loan also has a monthly mortgage insurance payment of $104 per month. By refinancing into a 30 year fixed rate conventional loan at 4.00%** (4.03% APR), the new principal and interest payment is $1,193, lower by $149. Because conventional loans with at least 20% equity do not require mortgage insurance, the $104 per month premium is also eliminated for a total monthly reduction in payment of $253.
Keep in mind, this type of transaction only works for those with enough equity in the home. For those without equity, an FHA streamline refinance should be considered first.
Ask our lending experts if you can remove your FHA mortgage insurance with a conventional loan.
Yes, conventional refinance loans are available for single family homes or 2- to 4-unit properties for both owner occupied and rental homes.
Unfortunately, no, a new loan will require a new appraisal associated with it. In addition, recent home sales in the area can reflect updated value information for your property and the lender will require recent data.
Fannie Mae states that a property must not be listed at the time of loan application. It must be taken off the market prior to the date of the application for Rate and Term refinances. For cash out refinances, any home listed in the last 6 months must have a loan-to-value no more than 70%.
Even though conventional refinance loans may not require tax returns for a wage-earner, individual lenders can have their own internal guidelines, called overlays, in addition to standard approval requirements.
A refinance is a brand new loan that replaces an existing one, regardless of who the new lender will be. Your lender will ask for a brand new application, signed, reflecting the current date.
You will need an updated title policy to accompany your loan. As with other documentation, changes can occur from the period between your previous loan and current conventional refinance loan. Most states allow title insurance companies to offer discounts on recently issued title policies.
Yes, you can refinance multiple loans into one, given sufficient equity in the property. When paying off a second mortgage, however, it’s typically viewed as a-cash out refinance, which incurs higher interest rates.
Yes, you can refinance and pull cash out for any purpose, including home improvements.
Conventional loan rates are great and it’s the perfect time to lock in your rate. You can complete this short one-minute form for a free quote.
*The scenario includes the following information:
Loan amount $200,000; Property Value $500,000; Lender Fees $800; Monthly payment does NOT include $165 monthly tax and $85 per month insurance payment; Borrower credit score = 740
Note Rate Prin/Int Pymt APR
5.00% $1,073 5.04
4.00% $ 954 4.03
**The scenario includes the following information:
Loan amount $250,000; Property Value $500,000; Lender Fees $800; Monthly payment does NOT include $165 monthly tax and $85 per month insurance payment; Borrower credit score = 740
Note Rate Prin/Int. Pymt APR
4.00% $1,193 4.03