Can You Refinance With an FHA Loan?

The Federal Housing Administration (FHA) offers various mortgage insurance programs designed to make homeownership more accessible. For current FHA loan holders, refinancing can be a strategic financial move, enabling homeowners to potentially secure a lower interest rate, adjust their loan terms, or even access accumulated home equity. Refinancing an existing FHA loan is a common practice, and understanding the available options and requirements is important.

Types of FHA Refinance Options

Homeowners with an existing FHA loan have several refinance options, each tailored to different financial goals. One common choice is the FHA Streamline Refinance, which simplifies the process for existing FHA borrowers seeking a lower interest rate or a different mortgage type, such as switching from an adjustable-rate to a fixed-rate loan. This option is characterized by minimal documentation and often does not require a new appraisal or extensive credit underwriting. The primary goal of a Streamline Refinance is to provide a “net tangible benefit” to the borrower, typically through a reduced monthly payment or a more stable loan structure.

Another option is the FHA Cash-Out Refinance, which allows homeowners to tap into their home equity. This refinance replaces the existing mortgage with a new, larger FHA-insured loan, and the difference is provided to the borrower as a lump sum of cash. This option is for homeowners who have built significant equity and wish to use it for purposes such as home improvements, debt consolidation, or other large expenses. Unlike the Streamline Refinance, a Cash-Out Refinance typically requires a new appraisal and full credit underwriting to assess the home’s value and the borrower’s financial standing.

The FHA Simple Refinance, also known as a Rate and Term Refinance, is an FHA-to-FHA refinancing option. This program allows borrowers to adjust their interest rate or loan term without taking cash out, similar to a Streamline but with more comprehensive underwriting requirements. It can be used to convert an adjustable-rate mortgage to a fixed-rate mortgage or to simply secure a lower fixed rate. This type of refinance often necessitates a new appraisal, a credit check, and a full review of financial documentation.

Homeowners might also consider refinancing an FHA loan into a conventional loan. This alternative is often pursued to eliminate FHA’s mortgage insurance premiums (MIP), which are typically required for the life of the loan or for a minimum of 11 years, depending on the loan-to-value (LTV) ratio at origination. Switching to a conventional loan can eliminate mortgage insurance once sufficient equity, usually 20% or more, is established in the home.

FHA Refinance Eligibility and Requirements

FHA refinance loans require meeting specific criteria that vary by refinance type. Generally, the property must be the borrower’s primary residence, and the existing mortgage must be current. A seasoning period is also common, requiring the borrower to have made at least six consecutive monthly payments on the original FHA loan, and at least 210 days must have passed since the closing date of that loan.

For an FHA Streamline Refinance, the most important requirement is demonstrating a “net tangible benefit” to the borrower. This benefit typically involves a reduction in the combined interest rate and mortgage insurance premium (MIP) by at least 0.50 percentage points, or converting an adjustable-rate mortgage to a fixed-rate mortgage. While lenders may have their own internal requirements, the FHA itself does not mandate a new appraisal or credit check for most Streamline Refinances, especially if the new loan does not reduce the monthly payment by more than 20 percent. Borrowers must have a history of on-time payments, generally no more than one 30-day late payment in the past 12 months, and all six most recent payments must be on time.

An FHA Cash-Out Refinance has more stringent requirements. Borrowers typically need a credit score of at least 580, though some lenders may require 620 or higher. The loan-to-value (LTV) ratio is generally limited to 80% of the home’s appraised value. Debt-to-income (DTI) ratios are also assessed, often capped around 43%. The borrower must have owned and occupied the property as their primary residence for at least 12 months prior to the application and have a history of timely mortgage payments for the preceding 12 months.

The FHA Simple Refinance, or Rate and Term Refinance, requires a full underwriting review, including a new appraisal, credit check, and verification of income and assets. This option allows for the inclusion of closing costs into the loan amount, provided the total loan remains within the property’s appraised value, typically up to 97.75% LTV. All FHA refinances require payment of both an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP). The UFMIP is 1.75% of the loan amount and can be financed into the loan, while the annual MIP typically ranges from 0.15% to 0.75% of the loan balance, paid monthly, with the duration depending on the initial LTV and loan term.

Preparing Your FHA Refinance Application

Before formally submitting an FHA refinance application, gathering necessary information and documentation can streamline the process. Lenders require financial records to assess a borrower’s ability to repay the new loan. This often includes recent pay stubs covering at least 30 days, W-2 forms from the past two years, and federal tax returns for the last two years. Bank statements for checking and savings accounts, along with statements for investment and retirement accounts, are requested to verify assets.

Beyond personal financial documents, information related to the property and current mortgage is needed. Borrowers should have their current mortgage statements, homeowners insurance policy declarations page, and property tax statements available. If the property is part of a homeowners association, relevant statements will also be needed. Lenders will conduct a credit check, so reviewing one’s own credit report beforehand can help identify and address any inaccuracies.

Preparation also involves considering the new loan’s terms, such as 15 or 30 years, and understanding the associated closing costs. Closing costs for FHA refinances typically range from 2% to 6% of the loan amount, covering various fees from the lender, third-party services, and prepaid expenses like property taxes and insurance. Researching and comparing FHA-approved lenders helps identify competitive rates and favorable terms.

The FHA Refinance Application Process

The FHA refinance application process begins with submitting the complete package to the chosen lender. The lender then initiates the underwriting review, which involves verifying all provided information, assessing creditworthiness, and confirming the borrower’s eligibility for the selected refinance program.

During underwriting, if an appraisal is required for the specific refinance type, such as a Cash-Out or Simple Refinance, the lender will order one to determine the property’s current market value. After the initial review, the borrower may receive a conditional approval, which indicates the loan is likely to be approved but requires additional documentation. Fulfilling these conditions promptly helps the process move forward.

Upon satisfying all conditions, the lender will issue a final approval, and the borrower will receive a Closing Disclosure document. This document provides a detailed breakdown of all loan terms, fees, and closing costs. Borrowers typically have a three-business-day review period before the closing appointment. The final step is the closing, where all loan documents are signed, and funds are disbursed. The first payment on the new mortgage will then be due according to the schedule outlined in the closing documents.