Refinance FHA Loan: How The Process Works
It’s often said – and it’s usually true – that the purchase of a home is the single biggest financial transaction you’ll make in your lifetime. With this in mind, just know that your home is a huge piece of your financial portfolio. And if you’re looking to access the money tied up in your house, you might consider refinancing.
Let’s walk through the ways you can refinance a Federal Housing Administration, or FHA, loan. We’ll also discuss the documents required to refinance and how to evaluate whether now is the right time for you to pursue this option.
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Can You Refinance An FHA Loan?
Yes, you can refinance an FHA loan. To refinance an FHA loan, you must qualify for a new FHA loan or another loan type.
Your credit score and credit history affect whether you qualify for a refinance. Payment history and any previous negative marks also impact who can qualify and when. Issues such as bankruptcy and forbearance can be a little more complicated, so we recommend speaking with a Home Loan Expert who can help you navigate through the process.
If you’re looking to do an FHA Streamline Refinance – going from one FHA loan to another for the purpose of changing your term, lowering your rate or both – you may face a waiting period.
It’s also worth noting that you’re typically required to have a minimum amount of equity in your home to refinance, and the necessary amount usually depends on the type of refinance loan you’re using and its purpose.
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Refinancing FHA Loan To Other Loans
Let’s take a look at what’s necessary to qualify for certain types of home loans when refinancing your FHA loan.
Refinance FHA Loan To Conventional Loan
Refinancing an FHA loan to a conventional loan is one of the most common refinance options for homeowners who have an FHA loan and want to get rid of mortgage insurance. There’s no private mortgage insurance (PMI) once you reach 20% home equity on a conventional loan, so this can be a big incentive to refinance from an FHA loan to a conventional mortgage.
To be approved to refinance from an FHA loan to a conventional loan, you’ll likely need a debt-to-income ratio (DTI) of 50 or lower and a median credit score of 620 or better. This credit requirement could prove to be an obstacle for some borrowers because FHA credit score requirements are more lenient.
FHA Cash-Out Refinance
If you’re looking to take cash out of the equity in your home, you can do an FHA cash-out refinance. You can only borrow up to 80% of your home’s value.
Doing a cash-out refinance with a conventional loan is generally the better option because you can avoid mortgage insurance premium (MIP) payments now and in the future, although you may have to pay PMI.
However, if you’ve encountered a large unexpected expense and are still working on improving your credit score, an FHA cash-out refinance may be your best choice.
FHA Streamline Refinance
An FHA Streamline Refinance is used when going from one FHA loan to another. This is only for rate/term refinances, meaning you can lower your rate or change your term, but you can’t take cash out. However, borrowers who qualify can take advantage of a couple of huge benefits:
- Less documentation: In some cases, not as much documentation is involved because you’ve been paying on your loan already. Verifying your income and assets may be easier.
- The appraisal often not being necessary: You might not need an appraisal with an FHA Streamline, meaning you might reach the closing table faster.
FHA ARM To FHA Fixed-Rate Mortgage
The FHA also offers adjustable-rate mortgages (ARMs). If you took out an FHA ARM and your introductory period has expired or is about to expire, you might want to switch to a fixed-rate mortgage.
You’ll enjoy the peace of mind that comes with not having to worry about your monthly mortgage payment rising in the future.
Reasons To Refinance An FHA Mortgage
Homeowners may want to refinance an FHA mortgage for various reasons, but one of three main reasons is usually the driving force behind the change. We’ll look at this trio of motivating factors in detail next.
To Lower Or Increase Your Monthly Payment
If you’re feeling financial stress and finding it hard to make your monthly mortgage payment, extending your mortgage term can help with that. Or maybe you can afford to pay off your mortgage in 15 years instead of the remaining time left on your current mortgage.
If paying less (or more) each month sounds good, you’re a great candidate for a rate-and-term refinance.
To Stop Paying MIP
With an FHA loan, you’ll pay an upfront mortgage insurance premium and then continue to make monthly payments for at least the first 11 years of the mortgage, regardless of the size of your down payment or how much home equity you build. It’s possible, however, to drop MIP after 11 years if you made a down payment of 10% or more.
Conventional mortgages stop charging home buyers for PMI – the private sector equivalent of MIP – when homeowners reach a home equity level of 20%, or 80% loan-to-value ratio (LTV).
If removing MIP from your monthly mortgage payment sounds like a plan, you might be interested in trading in your FHA mortgage for a conventional mortgage.
To Lock In A Lower Interest Rate
If you originally selected an FHA adjustable-rate mortgage and your introductory period is coming to an end, you might want to consider applying for a fixed-rate mortgage to lock in your mortgage rate if rates are trending downward.
Refinance FHA Loan FAQs
Next up are a few frequently asked questions on the topic of refinancing an FHA loan.
How soon can I refinance an FHA loan?
You must meet these three “seasoning requirements” before you can refinance your FHA loan:
- You must have made six payments on the FHA-insured mortgage being refinanced.
- Six months must have passed since the first payment due date of the FHA-insured mortgage being refinanced.
- The FHA-insured mortgage being refinanced must be 210 days past the closing date.
The term “seasoning” refers to how long you need to hold on to something – in this case, a mortgage. It’s a method to determine how soon you can refinance an FHA Loan.
Do I have to pay MIP again if I do an FHA Streamline?
When you refinance with an FHA Streamline, you’ll receive a refinance credit for your previous MIP payment toward your new upfront MIP payment. But, yes – you’ll have to pay MIP as long as you keep the mortgage.
You can escape paying mortgage insurance by later refinancing to a conventional mortgage, as long as you have at least 20% home equity.
Do FHA loans have prepayment penalties?
No, FHA loans don’t have prepayment penalties. Changes made in the wake of the 2008 recession prohibit prepayment penalties on FHA loans.
The Bottom Line: You Have Several Options For Refinancing Your FHA Loan
FHA loans have many benefits, including a low down payment and flexible credit requirements. Still, it might at some point make sense to refinance your mortgage to remove MIP, lower your interest rate, change your term or take cash out.
If you’re thinking of refinancing your FHA loan, to see your options so you can make the best financial decision.
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