Below, we go over four different types of FHA loan refinances. If the benefits of an FHA loan appeal to you, consider whether you qualify for the following FHA refinance options:
1. FHA Simple Refinance
An FHA Simple Refinance is a viable option for homeowners who originally purchased their home with an FHA loan. As the name implies, this straightforward refinance option offers homeowners the opportunity to lower their interest rate or their monthly mortgage payment.
The FHA Simple Refinance can also allow homeowners to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan, if preferred.
Qualifying for an FHA Simple Refinance means meeting certain requirements, including credit score requirements and certain income limits. Typically, a credit score of 580 is necessary to qualify for an FHA Simple Refinance.
Payment history is also considered. For you to be eligible, all your loan payments from the last 6 months must be up to date. A home appraisal will be completed to determine whether your home’s value has changed.
Pros Of An FHA Simple Refinance
Opportunity to finance closing costs: By lumping your closing costs into the overall loan amount, the upfront costs of refinancing are lower.
Opportunity to adjust your interest rate: This could mean obtaining a lower rate or switching from an ARM to a fixed-rate loan.
Opportunity to remove the co-borrower from the mortgage: If you purchased your home with another person who no longer needs to be on the loan, refinancing can offer you a chance to remove the co-borrower.
Cons Of An FHA Simple Refinance
Borrowers can’t take money out: The FHA Simple Refinance option does not come with a cash-out feature, so if you’re looking to tap into home equity, this isn’t the best option.
Borrowers will have to get a home appraisal: To determine your home’s value, an appraisal will be required. This can take time and money and extend the refinancing process.
2. FHA Streamline Refinance
Much like the Simple Refinance option, the FHA Streamline Refinance is available to homeowners with existing FHA loans who are looking to lower their interest rate and monthly payment.
But unlike the Simple Refinance option, the Streamline Refinance may not require an appraisal or an in-depth credit report, allowing the process to move more quickly.
Refinance Requirements
To qualify for an FHA Streamline Refinance, you’ll need to have an existing FHA loan with no outstanding monthly mortgage payments. You must not be within 210 days of the closing date of your original home loan. Specifically, you’ll have to meet these conditions for your mortgage payments:
No payments more than 30 days late in the last 6 months
No more than one payment more than 30 days late within the past 12 months
At least 6 monthly payments made on your existing mortgage.
FHA Streamline Refinances also have a requirement surrounding net tangible benefit, which refers to the financial advantage gained by the borrower with a refinance. This means that for the FHA to approve the refinance, it needs to be quantifiably beneficial to you as the borrower.
For example, if you’re reducing the length of your loan term, the new interest rate can’t be higher than the rate on the current mortgage. The new monthly mortgage payment also can’t exceed the old payment by more than $50 per month.
Pros Of An FHA Streamline Refinance
Less strict mortgage lender requirements: Because the refinance is “streamlined,” this process requires fewer in-depth credit and income checks. In general, your lender may assume that if you’re able to pay your current monthly payment, you’ll probably be able to pay the new one.
No home appraisal required: Not having to wait for the home appraisal allows you to close on your refinance faster.
An option for homeowners who owe more than their home is worth: Even if you owe more on your mortgage than your home’s value, this is one of the few types of refinances you can still take advantage of.
Cons Of An FHA Streamline Refinance
Closing costs must be paid upfront: Unlike a Simple Refinance where you can lump these straight into the loan, an FHA Streamline Refinance requires the borrower to pay closing costs upfront, which are typically 2% – 6% of the loan amount.
Limited cash-out opportunity: With this refinancing option, borrowers can only take out up to $500 from their home equity.
Borrowers have to pay mortgage insurance premiums (MIPs):FHA MIP is actually required on all FHA loans, but if you’re looking to get away from an MIP, refinancing into a conventional loan might be a better option.
Refinancing from an FHA loan to a conventional loan can be a good choice for borrowers who've improved their credit and built equity in their home. You may be able to shorten your loan term, take advantage of lower interest rates and enjoy lower monthly payments by refinancing to a conventional loan.
FHA loans require borrowers to pay mortgage insurance premiums (MIPs) at closing and throughout the life of the loan. Specifically, you'll pay 1.75% of the loan amount at closing as your upfront MIP. Then, you'll pay MIPs of 0.15% to 0.75% of the loan amount every year.
The main benefits of refinancing your home are saving money on interest and having the opportunity to change loan terms. Drawbacks include the closing costs you'll pay and the potential for limited savings if you take out a larger loan or choose a longer term.
Because FHA closing costs include the upfront MIP, an FHA loan can have average closing costs on the higher end of the typical 3% – 6% range. That doesn't diminish in any way the value of getting an FHA mortgage, with its low down payment, lower interest rates and flexible underwriting.
Here are a few guidelines for how long you must wait between closing on your FHA mortgage and applying for an FHA Streamline Refinance: You must have made at least six payments on your FHA mortgage. At least 6 full months must have passed since the first payment was due on the mortgage.
By refinancing an FHA loan to a conventional loan, you could get a lower interest rate and save money on mortgage insurance payments. Requirements to refinance include having a minimum 620 credit score and 20 percent equity in your property.
Yes, you can refinance from an FHA loan to a conventional loan within six months. However, you would first want to consider whether doing so would save you money.
Some reasons a seller might refuse an FHA loan include misconceptions about longer closing times, stricter property requirements, or the belief that FHA borrowers are riskier.
Because FHA loans help low- to moderate-income borrowers with less-than-stellar credit become homeowners, sellers may feel that FHA buyers are less likely to be approved for a loan than conventional borrowers.
Unfortunately, the typical home buyer using an FHA loan is unlikely to have excess cash upfront. If a home buyer has less cash to put toward a down payment, they may be less likely to be approved for a mortgage, depending on the state of their finances.
If you're currently in the market looking to buy a triplex or fourplex with FHA financing, you need to see if the property's rents pass the Self-Sufficiency Test. To be “self-sufficient” means that 75% of the property's rents need to cover the monthly payments.
FHA mortgage insurance for HUD-approved lenders. Eligible Activities: The property must contain at least 5 residential units with complete kitchens and baths and have been completed or substantially rehabilitated for at least 3 years prior to the date of the application for mortgage insurance.
FHA loans require a minimum 3.5 percent down payment for borrowers with a credit score of 580 or more. Borrowers with a credit score of 500 to 579 need to put 10 percent down to get an FHA loan. Conventional conforming mortgages only require 3 percent down, and VA and USDA loans require no down payment.
Yes, you can refinance your FHA loan to a conventional loan. Many borrowers do just that once they've increased their credit score and built equity in their homes. Many borrowers refinance an FHA loan to conventional to eliminate the required mortgage insurance on FHA loans.
These costs can total thousands of dollars; they're typically 2% to 5% of the loan amount. You may be able to lower them by paying a higher interest rate.
The biggest benefit to a conventional loan is that you don't pay mortgage insurance if you have 20% equity in the home. But not everyone can qualify. You need good credit (at least a 620 score) and a solid employment history. FHA refinancing is often better for lower-credit borrowers.
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.
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