Can I Refinance an FHA Loan? Here’s What to Know

An FHA loan, insured by the Federal Housing Administration, helps make homeownership more accessible with flexible qualification requirements. These loans typically feature lower down payment options and lenient credit score criteria. Refinancing involves replacing an existing home loan with a new one, often to secure more favorable terms or access home equity. This can lead to a lower interest rate, reduced monthly payment, or a different loan term.

Types of FHA Refinance

Homeowners with an existing FHA or conventional mortgage have several refinance options through the Federal Housing Administration. Each option serves a distinct purpose, aligning with different financial objectives.

FHA Streamline Refinance

The FHA Streamline Refinance is for homeowners with an existing FHA-insured mortgage seeking to lower their interest rate or change their loan term. It features reduced documentation, often waiving new appraisals or extensive credit and income verification. This option allows for a quicker process to achieve a more affordable monthly payment or convert an adjustable-rate mortgage (ARM) to a fixed-rate loan. Borrowers cannot receive more than $500 cash back, as its purpose is to improve loan terms.

FHA Cash-Out Refinance

The FHA Cash-Out Refinance allows homeowners to convert home equity into liquid funds. This refinance replaces their current mortgage, FHA or conventional, with a new, larger FHA-insured loan. The difference between the new loan and the existing balance is provided as a lump sum of cash. This cash can be used for home improvements, debt consolidation, or educational expenses.

FHA Rate-and-Term Refinance

The FHA Rate-and-Term Refinance allows homeowners to change their interest rate, loan term, or both, without accessing home equity. This option is available for existing FHA and conventional mortgages. Unlike the Streamline option, it typically requires a new appraisal and full underwriting, similar to an original home purchase loan. The goal is to optimize the loan structure for a lower monthly payment or a shorter repayment period, with cash back limited to minor refunds not exceeding $500.

Eligibility for FHA Refinance

FHA refinance eligibility depends on specific program criteria. While the Federal Housing Administration sets baseline standards, individual lenders may impose additional requirements.

FHA Streamline Refinance Eligibility

For the FHA Streamline Refinance, borrowers must hold an FHA-insured mortgage that is current. This means all payments must be on time for the most recent three months, with no more than one 30-day late payment in the past 12 months. A “net tangible benefit” is required, meaning the new loan must provide a clear financial advantage, such as a reduction in the combined interest rate and mortgage insurance premium (MIP) by at least 0.50 percentage points, or converting an adjustable-rate to a fixed-rate mortgage. The loan must also be seasoned for at least 210 days from its closing date, with at least six monthly payments made.

FHA Cash-Out Refinance Eligibility

The FHA Cash-Out Refinance has more stringent eligibility due to the borrower receiving cash. Homeowners must occupy the property as their primary residence and generally have lived there for at least 12 months prior to applying. Lenders typically require a minimum credit score, though FHA guidelines allow scores as low as 500.

Borrowers must have at least 20% equity, as the maximum loan-to-value (LTV) ratio is 80% of the home’s appraised value. A debt-to-income (DTI) ratio generally needs to be below 43%. A consistent payment history is also required, usually demonstrating on-time mortgage payments for the past 12 months.

FHA Rate-and-Term Refinance Eligibility

For an FHA Rate-and-Term Refinance, the property must be the borrower’s owner-occupied primary residence. The existing mortgage, FHA or conventional, needs to be current at application. Credit score and debt-to-income ratio requirements apply, often similar to an original FHA purchase loan, and depend on the lender’s overlays. This refinance involves a full underwriting process, including an appraisal to determine the property’s current value.

Applying for an FHA Refinance

Applying for an FHA refinance begins with identifying a suitable FHA-approved lender. Borrowers should compare offers from various lenders to find competitive interest rates and favorable terms.

Required Documents

Once a lender is selected, the application requires submitting various financial documents. These typically include recent pay stubs and W-2 forms for income verification, bank statements, and other asset documentation to confirm financial stability. Current mortgage statements, property details, and homeowners insurance policy details are also necessary.

Underwriting and Appraisal

After submitting the application and supporting documents, the lender initiates underwriting. This involves reviewing the borrower’s financial profile, including credit history, income stability, and debt obligations, to determine eligibility. For FHA Cash-Out and FHA Rate-and-Term refinances, an appraisal is typically ordered to establish the property’s current market value and confirm the loan-to-value ratio.

Closing the Refinance

Upon successful underwriting and appraisal, the loan moves to closing. Borrowers sign all necessary legal documents, including the new mortgage note and deed of trust. Funds are then disbursed, with the new FHA loan paying off the existing mortgage. Closing typically occurs at a title company or attorney’s office.

Costs of FHA Refinance

Refinancing an FHA loan involves several costs, similar to purchasing a home. These expenses fall into two main categories: closing costs and FHA-specific mortgage insurance premiums.

Closing Costs

Closing costs, covering various services and fees, typically range from 2% to 6% of the new loan amount. These include origination fees charged by the lender for processing the loan, appraisal fees to determine the home’s value, and title insurance to protect both the lender and borrower from property title defects. Additional costs may encompass recording fees, credit report fees, and document preparation charges. Borrowers can roll some costs into the new loan amount or pay them out-of-pocket at closing.

Upfront Mortgage Insurance Premium (UFMIP)

The Upfront Mortgage Insurance Premium (UFMIP) is a one-time fee equal to 1.75% of the loan amount. This premium is generally paid at closing, though most borrowers opt to finance it by adding it to their new loan balance. If a borrower refinances an existing FHA loan to another FHA-insured mortgage within three years, a portion of the previously paid UFMIP may be credited towards the new UFMIP.

Annual Mortgage Insurance Premium (MIP)

FHA loans also require an Annual Mortgage Insurance Premium (MIP), paid monthly as part of the mortgage payment. The annual MIP rate varies based on the loan amount, term, and loan-to-value (LTV) ratio, typically ranging from 0.15% to 0.75%. The duration for which this annual MIP must be paid depends on the initial loan’s LTV and term; for instance, if the initial down payment was less than 10%, MIP is generally required for the entire loan term.