Can You Refinance With a FHA Loan?

Homeowners often explore options to adjust their mortgage terms or access home equity, and refinancing can serve these purposes. For those with a Federal Housing Administration (FHA) loan, or who wish to obtain one, FHA-insured refinancing is a viable path. The FHA offers specific refinance programs tailored to different homeowner needs, providing flexibility in managing mortgage obligations and achieving financial benefits like a lower interest rate or cash from equity.

Understanding FHA Refinance Options

The FHA offers several refinancing options, each designed to meet different financial goals. These programs address various situations, from lowering an interest rate to accessing home equity.

FHA Streamline Refinance

The FHA Streamline Refinance is a popular choice for homeowners with an existing FHA-insured mortgage. Its primary purpose is to lower the interest rate or monthly payment, or to convert an adjustable-rate mortgage (ARM) to a fixed-rate loan. This program requires reduced documentation, often not needing a new appraisal or extensive income and credit verification, which expedites the process.

To qualify, the mortgage must be FHA-insured and current, with no more than one 30-day late payment in the past 12 months, and no late payments in the last six months. Borrowers must also demonstrate a “net tangible benefit,” meaning the refinance results in a clear financial advantage, such as a lower principal and interest payment. Cash back to the borrower is not permitted, except for minor adjustments at closing.

FHA Cash-Out Refinance

The FHA Cash-Out Refinance allows homeowners to tap into their home equity by replacing their existing mortgage with a new, larger FHA-insured loan. The difference between the new loan amount and the existing mortgage balance is provided to the borrower as cash. This option is available to homeowners with either an existing FHA loan or a non-FHA loan, offering a way to convert home equity into liquid funds for various uses. The maximum loan-to-value (LTV) ratio for an FHA cash-out refinance is 80% of the home’s appraised value, meaning the new loan amount cannot exceed 80% of the property’s current market value.

FHA Rate and Term Refinance

Another option is the FHA Rate and Term Refinance, sometimes referred to as a “Simple Refinance” when applied to existing FHA loans. This program focuses on changing the loan terms, such as the interest rate or the loan duration, without providing cash back to the borrower beyond minor refunds. It can be used to refinance an existing FHA mortgage or to switch from a conventional (non-FHA) loan to an FHA-insured loan. Unlike the Streamline option, a Rate and Term Refinance requires a new appraisal and credit check to assess the property’s value and the borrower’s financial standing. This ensures the new loan terms align with current market conditions and the borrower’s ability to repay.

General Eligibility Criteria

Qualifying for an FHA refinance loan involves meeting specific criteria set by the Federal Housing Administration. While each FHA refinance option may have additional rules, common factors include credit history, debt levels, and property standards.

Credit Score Requirements

Credit score requirements are a primary consideration for FHA refinancing. While the FHA has minimum credit score guidelines, many lenders impose higher internal credit score minimums for refinance transactions. For instance, some lenders may require a minimum FICO score of 620 or higher for FHA cash-out refinances. Streamline refinances, particularly non-credit qualifying versions, may have less stringent credit re-evaluation requirements, often only verifying on-time mortgage payments.

Debt-to-Income (DTI) Ratios

Debt-to-income (DTI) ratios are assessed to determine a borrower’s capacity to repay the loan. The FHA generally looks for a front-end DTI ratio (housing expenses) of up to 31% and a back-end DTI ratio (housing expenses plus other recurring debts) of up to 43%. However, flexibility exists, and borrowers with strong compensating factors, such as significant cash reserves or a history of managing higher payments, may qualify with DTI ratios up to 50%, or even higher with some lenders.

Property Eligibility

Property eligibility requires the property to meet the FHA’s Minimum Property Standards (MPS). These standards ensure the home is safe, secure, and structurally sound, providing a healthy living environment for occupants. An FHA-approved appraiser will evaluate the property to confirm it meets these requirements, which include adequate heating, electrical, and plumbing systems, as well as structural integrity. The property must also be owner-occupied, meaning the borrower intends to use it as their primary residence.

Mortgage Payment History

Mortgage payment history is important, especially for FHA streamline options. Borrowers must have a consistent record of on-time payments on their existing mortgage. For Streamline refinances, this generally means no late payments in the last six months and no more than one 30-day late payment in the preceding 12 months. For cash-out refinances, a strong payment history, without any late payments in the past 12 months, is expected.

Loan-to-Value (LTV) Limits

Loan-to-value (LTV) limits vary by refinance type. For an FHA cash-out refinance, the new loan amount is capped at 80% of the home’s appraised value. FHA Rate and Term refinances generally allow an LTV of up to 97.5% for owner-occupied primary residences. FHA Streamline refinances, which do not require an appraisal, may allow for a higher or unlimited LTV, as the focus is on the net tangible benefit rather than equity extraction.

Information and Documents Needed

Preparing for an FHA refinance application involves gathering personal and financial documents. These materials allow the lender to assess eligibility, verify income and assets, and confirm property details.

Personal Identification Documents

Personal identification documents are necessary to confirm the applicant’s identity. This includes a valid driver’s license or state-issued identification card, along with a Social Security card. For non-citizens, proof of legal residency or eligibility to work in the U.S. may be required.

Income Verification

Income verification is a significant part of the application, demonstrating the ability to repay the new loan. Borrowers need to provide recent pay stubs, usually for the past 30 days, to show current earnings. W-2 forms from the past two years are also requested to confirm employment and annual income. For self-employed individuals, federal income tax returns from the past two years, along with year-to-date profit and loss statements, are required.

Asset Verification Documents

Asset verification documents confirm available funds for closing costs or reserves. Lenders ask for bank statements, often covering the most recent two months, for all checking and savings accounts. Statements from investment accounts, such as 401(k)s or brokerage accounts, may also be requested to show additional liquid assets. Any large or unusual deposits appearing on bank statements may require a letter of explanation and documentation of their source.

Current Mortgage and Property Information

Information related to the current mortgage and property is essential. This includes recent mortgage statements, the existing loan number, and contact information for the current lender. Property details, such as the full property address and possibly a copy of the existing deed or title policy, will be needed. If the property is part of a homeowners’ association, relevant HOA information, including contact details and dues, might be requested.

Credit Report

While the lender will obtain a credit report directly from reporting agencies, borrowers should be prepared to discuss any discrepancies or provide context for their credit history. This proactive approach can help clarify any potential issues that may arise during the credit assessment.

The FHA Refinance Process

The FHA refinance process involves several distinct stages, from selecting a lender to the final closing. Each step requires attention to detail and timely communication.

Finding a Lender

The initial step involves finding an FHA-approved lender experienced in processing these specific types of loans. Not all lenders offer FHA products, so it is important to choose one that specializes in FHA-insured mortgages and understands their unique requirements. Comparing offers from multiple lenders can help secure competitive interest rates and favorable terms.

Application Submission

Once a lender is chosen, the formal application process begins. This involves submitting the previously gathered personal, income, asset, and property documentation to the lender. The lender’s loan officer will guide the borrower through completing the necessary application forms, which consolidate all the provided information. Some lenders offer online portals for convenient submission of documents and application details.

Underwriting

Following the application submission, the loan moves into the underwriting phase. During this stage, the lender’s underwriting team reviews all submitted documents to verify information, assess financial risk, and confirm that the borrower and property meet all FHA and lender-specific eligibility criteria. This includes evaluating credit history, DTI ratios, and validating employment and income.

Appraisal and Inspection

An appraisal and, if necessary, an inspection of the property may be ordered by the lender, particularly for FHA cash-out or Rate and Term refinances. The appraisal determines the property’s current market value and confirms it meets FHA Minimum Property Standards. If any property deficiencies are noted, they may need to be addressed before the loan can proceed to closing.

Loan Approval and Disclosures

Upon successful completion of underwriting and any required property evaluations, the loan receives conditional or final approval. The lender will then provide the borrower with loan disclosures, which outline the terms of the new mortgage, including the interest rate, monthly payment, and closing costs. It is important for borrowers to carefully review these disclosures and ask any questions before proceeding.

Closing

The final stage is the loan closing, where all parties sign the necessary legal documents. This typically occurs at a title company or attorney’s office. Borrowers will sign the new promissory note, mortgage, and other relevant paperwork. Funds are then disbursed, the old mortgage is paid off, and the new mortgage is recorded. After closing, the borrower will receive information regarding their first payment due date and how to make future mortgage payments.