To qualify for FHA loan refinancing, you must:

1. Have a DTI (debt-to-income ratio) of 29%/41%
2. Demonstrate that you have a history of regularly paying your bills on time.
3. Have a stable income history

You do not need a credit report but having one is sometimes helpful. There are some additional considerations to make when using fha financing. FHA loan limits vary by county. You should check to see your county’s loan limits before budgeting for any finance charges. One additional advantage of an fha loan is that they are assumable. While risky, some home sellers are offering what are known as wrap-around loans to offer seller financing.

This means that your introductory period will reach its end and your interest rate and payment will begin to periodically adjust. So what does this mean for you?

Most importantly it means that your payment will increase. Rates have risen since you signed your last mortgage note. And in some cases your mortgage payment may increase by 30 percent. So if you were paying $1,200 a month before, you may be looking at a monthly payment closer to $1,560. For many borrowers this will come as quite a shock. Many borrowers are not familiar with the details of their ARM. And there are just as many who can not afford a substantial increase in their monthly payment.

So what are your options? Well, the first thing to do is to pull out all of your mortgage documentation. Determine when it is that your particular loan will readjust. Did you have a 1 year, a 2 year, a 3 year or a 5 year ARM? Did you have an option ARM? If you had an option arm then your loan will probably recast 5 years after you signed. In some cases, however, it may be only 3 years. The highest number of loans will reset around September, October and November. So getting on top of this now would be a good idea.

Next you will want to meet with your mortgage broker or retailer. Have them check your credit and explain your options as far as refinancing goes. This will be the route most of us will take. Remember too that even though mortgage rates are higher now, you probably saved thousands of dollars versus your neighbors who got a fixed rate. And actually mortgage rates are still at historic lows despite having risen over the past year or so.

For a few people, refinancing will not be an option. This may be the case if your credit has seriously deteriorated or if your home’s value has dropped precipitously. You still have options. Your first option is to call your lender. You could tell them you are having a hard time making the new payment and you don’t want to lose the house. Then you could ask if they could possibly extend the loan’s initial period one year. The worst case scenario is that they will say no.

Another option is to sell your home. If you can do so without a realtor, you can save a large amount of money that way. There are numerous websites that give free advice on selling a home without a realtor. And some companies like forsalebyowner.com charge only a small fee and provide you with some of the key services of a realtor such as providing the contract and listing your property on the Multiple Listing Service (MLS).

Hopefully you won’t find yourself in this situation. But regardless of what your home is worth or how your credit has changed, it is still a good time to review your current adjustable rate mortgage and come up with a plan of attack for when your reset takes place.

Once you have this mortgage, you can reset the interest rate, choosing between fixed or adjustable rates. You can alter your payment arrangements, choose an interest only option, or make fully amortized payments of both interest and principal. What this means is that you can adjust you loan terms after origination twice within the same calendar year. The first reset is free, and additional resets are a flat fee of $250, up to two per year. You don’t ever have to apply for a refinance, a 15 minute phone call, or visit to your lender is all it takes. Once your mortgage is paid down sufficiently, you can tap into that equity by writing a check, cash advance, or even use a credit card, in most states. You’ll need a minimum of 10 percent down, but Washington Mutual doesn’t charge an origination fee and waives various other costs you’d typically pay like appraisal and title fees. Your line of credit will continue to grow as you pay down your mortgage over time. On the downside, your interest rate will start off slightly higher, maybe half a percentage point. For most homeowners, this will be worth it, due to the added flexibility. It’s designed to make refinancing easier and help the lender to retain customers who might otherwise shop their loan elsewhere at refinance time. In all it would seem a win-win situation for all.

First you will want identification. Because of the Patriot Act, lenders are required to obtain a copy of your driver’s license and social security card or permanent resident alien card. When you make copies of these, try to make enlarged, color copies. Enlarging the copies will ensure that people can still read the information on the cards after being faxed numerous times.

Next you will want to gather your employment and income information. Gather together all of your W2s for the most recent two years. You will also need to provide your last full month’s worth of paystubs. Some companies allow their employers to print these out online. If you use online print outs, make sure they show your name and social security number. It is also a good idea to get the phone number for your Human Resources department. This will allow your loan officer to obtain the necessary verification of employment.

After employment information you will need to document your assets. Your loan officer will need the most recent two months worth of bank statements–ALL PAGES. I can’t stress this enough. All pages are needed. For investment or retirement accounts you will need to provide all pages of your most recent quarterly statement. Some people black out the account numbers on these statements. But chances are the mortgage company will require those numbers not only for your application but so that they can independently verify that you own those accounts and the accounts contain what you say they contain. Fraud is too prevalent for mortgage companies to not verify.

Last you will want to provide your loan officer with the name and phone number of your insurance agent. This will allow the loan officer to quickly obtain proof of insurance as well as an invoice for insurance that will be paid at closing.

By providing your loan officer will all of this information upfront, you will save yourself quite a bit of last minute scrambling. This will also help to ensure that your loan closes as quickly as possible.

Steady employment means a mortgage company wants to see you employed in the same job or same line of work for two years or more. Obviously a mortgage applicant with a new job every two months is less attractive looking than another applicant who has been with the same company for 10 years.  And some jobs are less attractive looking than others. For example, loan officers and realtors can have a difficult time getting mortgages. Presumably this is because they have a deeper understanding of the loan process and therefore are more likely to manipulate it.  Thus mortgage companies require higher standards before lending to these types of applicants.  Members of the clergy can also have difficulty obtaining loans.  And obviously the unemployed have a particularly difficult time obtaining low cost loans. What’s more surprising though is that retired people can have trouble getting loans sometimes. Another group who has more difficulty is the self-employed applicant. The self-employed will usually need to document that they have been self-employed for a minimum of two years. Usually a business license or a letter from the applicant’s CPA will suffice as documentation. In the case that neither of these can be produced, a small number of lenders will allow more creative types of verification such as letters from the applicants customers or suppliers.

After they examine your employment, a mortgage company will examine your income.  They like to see consistent monthly income. Usually they will look at your paystubs and W2s.  Some mortgage companies will average your income from the past two years and then determine your average monthly income. Other companies will use their own formulas.  Overtime, bonuses, and commissions may not be counted fully in your monthly average. Mortgage companies try to determine what it is you are really bringing in every month.  They look at your gross monthly income not your net. Once the gross monthly income is calculated, they compare it to a few of your monthly payments: housing, installment loans, and credit card payments.  Basically they are looking at your proposed mortgage payment and any other monthly payments showing up on your credit report including alimony and child support.  Now they calculate your debt to income (DTI) ratio.  Most lenders are looking for a ratio below 40 percent.  Some require a lower DTI and some go as high as 55 percent.

Next, a mortgage company looks at your assets. Here they want to see that you have liquid assets you could immediately access should something happen. For example, if you lost your job, would you be able to make your mortgage payment until you found a new one? Most lenders want to see a specific minimun in your checking or savings account. Usually that number is 6 months of your full mortgage payment (the new payment the new loan will give you; not what you are currently paying).  That includes taxes and insurance for all six months.  Mortgage companies will typically only count about 70 percent of a retirement account. This is because of the additional taxes and penalties you will likely pay if you access the money early.  Mortgage companies refer to your assets as reserves. And they typically want to see that these reserves are “sourced and seasoned”.  This means that they want to see that you have had the money for at least two months. This way they know that you didn’t just borrow the money from a relative and will give the money back as soon as the loan closes.

There are few borrowers who apply for a mortgage and meet all of these qualifications perfectly.  So the important thing is to show the mortgage company the entire picture. Your loan officer can help you do this. So your best bet is to be entirely upfront with your loan officer and help him or her to package your application in the most attractive way possible.

Adjustable rates are consistently lower than fixed rates.  The main reason for this is that with an adjustable rate, the bank exposes itself to less risk. Instead of committing to an investment where it makes a fixed rate of return for 30 years, it can more closely approximate a maximum rate of return for 30 years.

But adjustable rates aren’t just preferable for lenders, they also make more sense for consumers. Besides the obvious lower rates and therefore lower payments, adjustable rates also allow consumers to take advantage of falling interest rates without paying all of the closing costs for a refinance.  And consumers with adjustable rates also avoid all of the headaches associated with refinancing-meeting with your loan officer, shopping your loan to make sure you are getting the lowest rate, providing tons of documentation, and taking time off of work to sign your loan documents.

The other big advantage of ARMs is that they offer more flexibility for less qualified borrowers. Not all borrowers fit the narrow “A” Paper profile.  For example, self-employed borrowers don’t qualify for many programs.  Even if you have owned your own business for years and have been very successful.

Of course, having an adjustable rate mortgage requires more vigilance than a fixed rate.  But any wise borrower needs to manage his mortgage. This means fully understanding your ARM before you sign your loan documents.  Make sure you understand how your loan works. What index is your loan based on? What is your margin? How high can the rate go? When does your loan readjust?  This may require sitting with your loan officer or his manager several times until all of your questions are answered.

You will also want to carefully read every one of your loan documents at the time of signing.  Most title agents want to sign you as quickly as possible but for transactions this big, it’s worth taking the time to read every word. For most people, their mortgage is their biggest financial obligation, and you want to make sure you get it right.  And since new Adjustable rate loan products enter the market every month, you really have to do your homework.

*Simon, Ruth, “Is Greenspan Right About Your Mortgage?,” The Wall Street Journal, February 25, 2004, D1.

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