Can You Refinance With an FHA Loan?

Homeowners often refinance their mortgages to achieve financial objectives, such as securing a lower interest rate or accessing home equity. The Federal Housing Administration (FHA) offers several refinancing options for those with FHA-insured loans and some homeowners with other loan types. FHA loans are government-backed, leading to more accessible qualification criteria compared to conventional loans. This backing reduces risk for lenders, which can translate into more favorable terms for borrowers.

FHA Refinance Options

FHA refinancing encompasses distinct programs tailored to different homeowner needs.

FHA Streamline Refinance

The FHA Streamline Refinance is for homeowners with an existing FHA-insured mortgage. This program simplifies refinancing by often eliminating the need for a new home appraisal or extensive income and credit documentation. Its purpose is to help borrowers achieve a lower interest rate, reduce their monthly mortgage payment, or convert an adjustable-rate mortgage (ARM) to a fixed-rate loan. A key requirement is a “net tangible benefit” to the borrower, such as a reduction in the combined interest rate and mortgage insurance premium by at least 0.50 percentage points, or an ARM to fixed-rate conversion. While closing costs are typically paid upfront, some lenders may allow them to be financed through a higher interest rate.

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. This program is available to homeowners with any mortgage type, not just existing FHA loans. Borrowers receive the difference between the new loan amount and their existing mortgage balance as a lump sum, usable for purposes like home improvements or debt consolidation. The maximum loan-to-value (LTV) is generally 80% of the home’s appraised value. Unlike the Streamline option, a new home appraisal is always required to determine the property’s current market value.

FHA Rate and Term Refinance

The FHA Rate and Term Refinance focuses on changing the interest rate or loan term without providing substantial cash back. This option is for homeowners with an existing FHA loan or those with a conventional mortgage refinancing into an FHA loan. It requires a new appraisal and a full review of the borrower’s credit and income. Similar to the Streamline option, any cash back at closing is typically limited to $500 or less. Closing costs can often be rolled into the new loan amount, reducing out-of-pocket expenses.

Eligibility for FHA Refinancing

Eligibility for FHA refinancing depends on borrower and property qualifications, which vary by program.

Borrowers must demonstrate a satisfactory mortgage payment history. For an FHA Streamline Refinance, there should be no payments more than 30 days late in the past six months, and no more than one 30-day late payment within the last 12 months. For FHA Cash-Out Refinances, no late payments in the last 12 months are typically expected. The existing mortgage must be current at the time of application.

Credit score requirements are a factor, though FHA loans are generally more flexible than conventional loans. While the FHA’s minimum credit score can be as low as 500, many FHA-approved lenders impose higher minimums, often requiring 580 or above for most refinance programs. For an FHA Cash-Out Refinance, some lenders may require a score closer to 600 or 620 due to increased risk. Debt-to-income (DTI) ratios are also evaluated; generally, the total DTI should not exceed 43%, though it can be higher, up to 56.9%, with compensating factors like significant cash reserves or a strong credit profile.

Property qualifications are integral to the refinancing process. The property must be an owner-occupied primary residence for most FHA refinance options. For an FHA Cash-Out Refinance, the borrower must have owned and occupied the property as their principal residence for at least 12 months prior to the loan application. Eligible property types include single-family homes or FHA-approved condominium units. While FHA Streamline Refinances typically do not require a new appraisal, FHA Cash-Out and Rate and Term Refinances necessitate one to determine the property’s current value and ensure it meets FHA health and safety standards.

Preparing for Your FHA Refinance Application

Before submitting an FHA refinance application, homeowners should gather specific personal and financial documentation. This streamlines the process and helps ensure a smoother application.

To prepare for your FHA refinance application, gather the following documents:

• Personal identification: Valid driver’s license or state-issued ID and Social Security card to verify identity.
• Proof of income: Recent pay stubs (at least 30 days), W-2 forms (past two years), and for self-employed individuals, tax returns (past two years) with a year-to-date profit and loss statement.
• Asset verification: Bank statements (past two to three months) and investment account statements to show funds for closing costs and reserves.
• Existing mortgage information: Recent mortgage statements detailing current loan balance, interest rate, and payment history.
• Other outstanding debts: Details for auto loans, student loans, and credit card accounts.
• Credit report: Review beforehand to identify and correct inaccuracies.
• Property-specific information: Current homeowners insurance policy. If an appraisal is required, prior appraisal reports or property deeds and title information can be helpful.
• Homeowners association (HOA) statements: If applicable, recent statements detailing dues and any special assessments.

Organizing and verifying these documents can expedite the FHA refinance process.

Navigating the FHA Refinance Process

Once documentation is organized, the FHA refinance process begins with selecting an FHA-approved lender. Compare loan offerings, interest rates, and lender-specific requirements, as these can vary. A knowledgeable loan officer can provide valuable guidance.

After choosing a lender, submit the refinance application package. This typically entails completing the lender’s forms and providing all collected financial and property documentation. Submission can often be done online, in person, or via mail. A thorough application allows the lender to move efficiently into underwriting.

During underwriting, the lender’s team reviews all submitted documentation to assess the borrower’s creditworthiness and the property’s eligibility. This involves examining income, assets, debts, and the financial picture to ensure compliance with FHA guidelines and lender overlays. If an FHA Cash-Out or Rate and Term Refinance is pursued, an appraisal will be ordered to determine the property’s current market value and confirm it meets FHA standards. This appraisal helps establish the maximum loan amount.

A title search will be conducted to confirm clear ownership and identify any existing liens. Title insurance is then secured to protect both the lender and borrower against future claims. The final stage is closing, where all parties sign the necessary legal documents, including the new mortgage note and deed of trust. The loan is funded, and the existing mortgage is paid off, completing the refinance. Following closing, borrowers receive information regarding their first payment due date on the new FHA-insured loan.