How to Refinance FHA Loans
A refinance FHA loan can be a valuable financial tool for many homeowners. Those who qualify for this program have several options, including simple, streamline, and cash-out. Conventional borrowers can also refinance a conventional mortgage into an FHA loan.
As you’ll see in this resource, there’s a lot to like about a refinance FHA loan. These loans are easy to qualify for, so you don’t have to worry about a lower credit score or household income. American Financing, in particular, can customize an FHA loan to fit your needs and budget.
Many homeowners look to refinancing because they want better rates, lower monthly payments, and access to cash. Not every type of FHA loan provides that level of flexibility, though. For example, borrowers cannot obtain cash back with an FHA streamline refinance.
It’s critical to work with a lender who understands your goals with a refinance FHA loan. Lenders should never take a one-size-fits-all approach with their loans, and that’s especially true with refinancing. Continue reading as we discuss who may benefit the most from an FHA refinance, specific loan options, and how the process works.
Who should consider an FHA refinance?
Any homeowner should look into a refinance FHA loan if they’re interested in lowering their rate and payment or taking out cash. A lower rate could mean hundreds of dollars in monthly savings, plus tens of thousands in the long run. Tapping into your home equity gives you the funds to improve your home or pay off high-interest debt, such as credit cards.
Who qualifies for an FHA refinance?
Not all borrowers qualify for a refinance FHA loan. You will need to prove two years of steady employment, preferably with the same employer. Lenders also want to see less than two 30-day late payments to debtors over the last two years.
Next, you must show you have 30% of your gross (before taxes) income available to cover mortgage payments. Additionally, your non-mortgage debt must not exceed 43% of your monthly income. It’s worth exploring a refinance FHA loan if you check all of these boxes and want to do everything you can to keep your mortgage payment as low as possible.
Remember that you’ll have to meet a few other requirements to obtain an FHA cash-out refinance loan. Most lenders require a borrower with a minimum of 20% equity or a maximum loan-to-value (LTV) ratio of 80%. Lastly, you’ll need to show that the property is your primary residence and not an investment home.
Advantages of a refinance FHA loan
Think back to when you purchased your home using an FHA loan. You benefitted from a minimum 3.5% down payment, relaxed credit score requirements, and low monthly mortgage insurance. The same is true with a refinance FHA loan, other than you won’t need a down payment to refinance.
Borrowers often bring up closing costs when asking about a refinance FHA loan. You can expect to pay between 2-5% of your loan amount on closing day. Consider asking your lender about rolling these costs into your new mortgage if it’s an option.
Disadvantages of a refinance FHA loan
Rest assured that there are only minor drawbacks to a refinance FHA loan. Though the qualifications tend to favor the borrower, this loan option is only available to current FHA borrowers. Plus, not as much flexibility exists with the cash-out component.
FHA refinance options
Are you not sure which refinance FHA loan is right for you? Thankfully, several options are available, including simple, streamline, and cash-out. Let’s take a closer look at these programs in greater detail.
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Think of the simple FHA refinance as the most straightforward option for borrowers. It allows you to switch from a current FHA loan to one with more favorable terms. For instance, perhaps current market rates are significantly lower than your rate, and you want to take advantage.
You’ll also benefit from a simplified lending process with an FHA refinance. Expect to provide documentation of income and assets like you did for your original loan. Your credit score will be a notable factor as well.
One other thing worth noting about this loan program: there’s no cash-out option. Borrowers who choose a simple FHA refinance typically lower their rate and payment or go from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. You’ll need to explore the cash-out FHA refinance if you’re interested in accessing some of your equity as cash.
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An FHA streamline refinance could be the best choice to lower your rate and monthly payment. Borrowers who choose this loan program refinance in less time and with minimal stress and documentation. Like the FHA simple refinance, an FHA streamline refinance is only available to those with an FHA loan.
There’s a lot to like about an FHA streamline refinance, including the ability to move forward without an appraisal. Your lender will determine the new loan amount by what you owe and not the current home value. Not accounting for an appraisal is a huge win for those on a tight budget who still want to consider a refinance.
While an FHA streamline refinance might offer several benefits, it also comes with a few drawbacks. The biggest one is that FHA lenders require borrowers to pay closing costs. Unlike conventional loans, you won’t be able to roll these costs into your new loan.
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The FHA cash-out refinance lets borrowers pay off their existing loan with a higher loan and receive the difference in cash. The amount you can borrow depends on the amount of equity in your home. Lenders require you have at least 20% equity to qualify for this loan option.
Requirements of an FHA cash-out refinance are more stringent than those of a streamline or simple refinance. To start, borrowers must have a credit score in the 600s and a debt-to-income ratio below 43%. Lenders will also verify that the property being refinanced is your primary residence.
Part of what makes an FHA cash-out refinance an attractive option is that you can use the funds for any purpose. Many borrowers take the money they receive and upgrade their homes. Other ideas include paying off high-interest debt or investing.
How does an FHA refinance work?
You talk to an FHA lender about refinancing to lower your rate, shorten your term, switch to a fixed rate, or take cash out. Your financial situation and goals will help your lender determine which option makes the most sense for you.
Once you submit an application and decide on a loan program, you work directly with your lender to gather all necessary documents. You’ll likely be asked to provide a recent mortgage statement showing a six-month payment history, bank statements, and tax returns. Consider preparing this information before talking to a lender to expedite the underwriting process.
After reviewing all documentation, your lender will set a closing date. Make sure you check whether you’re responsible for closing costs. You may not qualify for a refinance FHA loan if you cannot cover these expenses.
FAQ's
There are countless questions regarding an FHA refinance, especially how this loan option compares to a conventional refinance. Here are some answers to these frequently asked questions.
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An FHA refinance is ideal for those with a lower credit score. That said, it’s usually easier to qualify for an FHA refinance than a conventional refinance. Plus, as we mentioned above, those with an FHA loan may not need an appraisal, whereas lenders often require an appraisal with a conventional refinance.
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FHA borrowers can expect to pay between 2-5% of the loan amount with a refinance. Conventional borrowers, meanwhile, have the option to roll their closing costs into their new loan. The main difference is that FHA borrowers don’t have to pay for an appraisal.
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Not everyone qualifies for a refinance FHA loan. Lenders pay close attention to a borrower’s credit score, income, and debt-to-income ratio. Additionally, FHA homeowners are only eligible for certain refinance programs after six months with their original loan.
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No, borrowers who choose an FHA streamline refinance will still have monthly mortgage insurance. You’ll be responsible for the program’s annual mortgage insurance and a new fee equal to 1.75% of the loan amount. Your lender will add this fee to your loan.
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Say you’re looking to get out of a refinance FHA loan and into a conventional loan. You can do so as long as you meet the requirements for this financing. Consider making this move if you’re interested in getting rid of FHA mortgage insurance or a cash-out refinance.
