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Unable to Refinance? 11 Alternatives to Traditional Refinancing

Refinance alternatives if you don't qualify

When interest rates fall, homeowners rush to refinance. But what if something is preventing you from qualifying for a new loan?

If you aren’t eligible to refinance you could still have options. Here are eight refinance alternatives.

See if you're eligible for a refinance.

What Could Prevent You From Refinancing?

So, what could prevent you from refinancing if you qualified for a home loan in the past? Some of the most common issues include:

  • Your or your spouse's income is now lower

  • You’ve separated or gotten divorced since your purchase

  • Your credit score is lower than when you last qualified

  • Your home's value has decreased, and your loan is underwater

  • Your home needs significant repairs

Streamline Refinance Programs

A streamline refinance allows you to qualify without going through a detailed credit check, verifying your income, or obtaining a new home appraisal.

Unfortunately, streamline refinances are only offered for government-secured mortgages. There are not currently any conventional streamline refinance programs.

However, if you have an FHA, VA, or USDA loans, a streamline refinance can help you avoid issues related to:

  • A decrease in income

  • An increase in debt

  • Credit problems

  • An underwater mortgage

  • Homes in need of repair

1. FHA Streamline Refinance

The FHA Streamline refinance program is available to FHA loan holders who have had their mortgage for at least 210 days and made a minimum of six consecutive on-time payments. To be eligible, most borrowers with fixed-rate loans must be able to reduce their combined interest rate and mortgage insurance premium by 0.5%.

Unlike other refinance programs, the FHA streamline refinance requires you to pay your closing costs out-of-pocket – you can’t wrap them into your loan. Some lenders, however, may offer closing credits in exchange for a higher interest rate.

2. VA Streamline Refinance

Similarly, the VA streamline refinance program allows eligible borrowers with a VA-backed loan to refinance 210 days after they make their first payment. Homeowners must also have completed at least six monthly payments during that time.

As with the FHA program, you must be able to reduce your interest rate to qualify for the VA streamline. In contrast, VA guidelines allow you to roll your closing costs into the mortgage if needed.

3. USDA Streamlined-Assist

The USDA Streamlined-Assist requires that borrowers have a minimum of 12 consecutive on-time payments on their current USDA loan to be eligible. While other programs require you to reduce your interest rate with most loan types, the USDA streamline refinance only requires you to reduce your monthly mortgage payments (PITI) by at least $50 with your new loan.

4. RefiNow and Refi Possible

Lower-income homeowners with a conventional mortgage owned or securitized by Fannie Mae or Freddie Mac may benefit from the RefiNow and Refi Possible programs.

With Fannie Mae’s RefiNow and Freddie Mac’s Refi Possible loans, you must make no more than 100% of your area’s median income to be eligible. However, homeowners who have seen a reduction in their income or an increase in debt can qualify with a debt-to-income ratio of up to 65%. For most conventional rate-and-term refinances, this number is capped at 45%.

Plus, both programs allow homeowners to refinance without meeting minimum credit score requirements.

Only single-family primary residences are eligible for RefiNow and Refi Possible. And like other programs, refinancing must lower your monthly payment and reduce your interest rate by at least 0.5%. A new appraisal is usually required, although both programs provide qualified borrowers with a $500 appraisal credit at closing.

5. Mortgage Modification

Mortgage modifications are most commonly associated with borrowers facing financial hardship who are behind on repaying their loans. If you're in this category, mortgage modification may be your only choice – most lenders will only refinance current mortgages.

But even if you haven’t missed any payments, you can still talk with your lender about modifying your mortgage. A mortgage modification can work much the same as a rate-and-term refinance in that you may be able to cut your payments by:

  • Reducing your interest rate

  • Changing your loan type

  • Extending your repayment term

Both Fannie Mae and Freddie Mac allow lenders to offer Flex Modification programs for conventional loans that are current or no more than 90 days past due.

6. Renovation Refinance

If your home’s condition is keeping you from refinancing, some programs let you wrap in repair costs with the refinance.

These renovation refinances can fix items that make your home ineligible for financing, and you can even include purely cosmetic fixes as well.

Cashing Out Equity From Your Home

Want to cash out equity from your home but can't qualify for a traditional cash-out refinance?

7. Home Equity Loans

A home equity loan is a type of second mortgage. This means that your existing mortgage remains in place – interest rate, term, and payment – while you take out a second loan on top of it.

Home equity loans usually require a minimum credit score and standard underwriting, similar to other mortgage products. However, some home equity lenders have more leeway when establishing borrower guidelines.

If you need to cash out equity – especially for home repairs and improvements necessary to qualify for a standard refinance – shop around for a home equity loan program that fits your needs.

8. Home Equity Lines of Credit

Home equity lines of credit (HELOCs) are a lot like home equity loans in that they're second mortgages that leave your current loan intact. A HELOC allows you to withdraw your equity when needed, either with checks or a special credit card.

Home equity lines of credit begin with a draw period where you generally only pay interest on your outstanding balance. This is followed by a repayment period, which also includes your principal. Unlike fixed-rate home equity loans, HELOCs normally have an adjustable rate.

If you're planning to make multiple equity withdrawals over an extended period or are still determining exactly how much you'll need, a HELOC can offer greater flexibility than a home equity loan or even a standard cash-out refinance.

Like home equity loans, most lenders establish their own HELOC guidelines – if you're working with a mortgage company that can't approve your line of credit, shop around for another who can.

Other Alternatives to Refinancing

While less common and only suited for some situations, there are still a few other alternatives to refinancing that are worth mentioning.

9. Reverse Mortgages

If you are 62 years old or older and currently have a small loan balance (or no loan at all), you may want to consider a reverse mortgage. When you take out a reverse mortgage, you receive a lump sum at closing and are only required to repay it once you move, sell your home, or pass away.

10. Home Equity Agreements

Home equity agreements (HEAs) are a newer lending product that allows you to receive cash now in exchange for a percentage of your home's future appreciation. There are no monthly payments, and borrower guidelines are usually more relaxed than with other types of loans. Home equity agreements don't come due until you sell your property or reach the end of the loan term, which often ranges from 10 to 30 years with most HEA lenders.

11. Borrowing Against Your 401(k)

If you're unable to get a cash-out refinance because of home repairs that need to be made, consider borrowing against your 401(k) retirement account. Most people can withdraw 50% of their vested account value (up to $50,000) with favorable interest rates and a repayment term of up to five years. Plus, unlike borrowing from a lender, all interest payments you make on your 401(k) loan go right into your investment account.

Which Refinance Programs and Alternatives Do You Qualify For?

Refinancing can be a challenge if you’ve run into issues with your credit, income, or level of debt. In some instances, declining home values and necessary repairs can prevent borrowers from qualifying.

Working with a reputable and experienced mortgage professional can help you discover which refinance programs you may be eligible for and the alternative loan options that could suit your needs instead.

Check your refinance eligibility with a licensed lender.

About The Author:

Tim Lucas spent 11 years in the mortgage industry and now leverages that real-world knowledge to give consumers reliable, actionable advice. Tim has been featured in national publications such as Time, U.S. News, MSN, The Mortgage Reports, and more.

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