How to refinance an FHA loan

If you have a mortgage loan backed by the Federal Housing Administration (FHA), you may be wondering if this is a good time to refinance. Low interest rates could reduce your monthly payments, or you may be able to take cash out for expenses like home renovations or to pay down higher-interest debt.

Just because you can refinance doesn't mean it's a good idea. You need to consider the benefits and make sure you qualify under FHA refinancing requirements. Tally up your total mortgage payment with principal and interest as well as mortgage insurance premiums — which are required with FHA loans — and see if refinancing gives you a lower monthly payment. Or, if you're looking to reduce your loan term, make sure you won't end up with a payment you can't afford.

There are four main ways for existing FHA mortgage loan holders to refinance. Let's look at how each type of refinance works, what the requirements are and how you can get started.

FHA Simple Refinancing

You can get an FHA Simple Refinance that replaces your existing FHA insured loan with a new fixed-rate or adjustable-rate loan. Because you're already an FHA borrower, the process should be faster and simpler than when you got your original loan. Simple Refinances can be a good option for getting out of an existing adjustable-rate mortgage (ARM) loan, lowering your interest rate, or moving between fixed-rate and adjustable-rate loans.

With a Simple Refinance, you may be able to finance your closing costs, however you can't take cash out from your home equity. Consider if the benefits of this refinance outweigh this limitation.

How to qualify

To qualify for an FHA Simple Refinance, you must:

• Already have an FHA insured loan
• Be current on your payments and meet payment history requirements.
• Meet the loan requirements for credit score, income and other assets
• Have an appraisal of the property

The benefits of Simple Refinancing 

FHA Simple Refinance is a straight-forward process. You can add closing costs and prepaid costs into the loan, as long as it doesn't make the loan more than 97.75% of the home's value based on a current appraisal. This makes the option good for people who don't want to pay closing costs out of pocket.

You can also remove co-borrowers from the original mortgage if they are no longer needed, or if personal circumstances make it best to remove them.

FHA Streamline Refinancing

FHA's Streamlined Refinancing option doesn't require an appraisal and may not even need an additional credit check or income verification. Some lenders, however, may have additional requirements beyond those established by the FHA.

How to qualify

To qualify for an FHA Streamline Refinance, you must:

• Already have an FHA insured loan
• Have made at least six payments on your existing loan
• Be current on your payments and have no late payments
• Have your existing loan for 210 days
• Prove the refinance financially benefits you by giving you a lower interest rate or shorter loan term, with no more than a $50 payment increase.

The benefits of Streamline Refinancing

FHA Streamline Refinancing is best known for its low requirements that make the process move quickly. You won't have to pay money for an appraisal or credit check, and the reduced paperwork may mean lower closing costs.

What do I have to do?

Because there is no required credit or appraisal, you won't have much paperwork to complete. You may have to prove whether you're occupying the property or not and that you've made at least six payments on your existing loan.

You'll also have to be able to show that your interest rate will be lower with the new loan, or that your loan term is shorter by at least three years. It's possible you'll have to show that your reduction in interest rate plus MIP rate is at least 0.5% for a fixed-to-fixed refinance. The amount of rate change varies depending on if you're going from a Fixed to ARM, ARM to Fixed or ARM to ARM. Talk with your Home Lending Advisor to learn more.

FHA cash-out refinancing

If your property has increased in value or you've built up some equity, you may want to refinance your loan to take cash out for an important event, pay down higher-interest debt, finance tuition or remodel your house. Because you’re getting cash as part of your loan, the requirements to qualify are more stringent than those for FHA Simple or Streamline Refinancing.

How to qualify

• Have made at least the last 12 months of payments on time, during which time the home has been your primary residence
• Have enough equity in your home with a maximum Loan to Value of 80%
• Meet the minimum credit score
• Meet debt-to-income ratio standards

The benefits of cash-out refinancing

With an FHA cash-out refinance, you can potentially lower your monthly payment or change your loan term while taking money out to pay for the things you need. Most borrowers choose to focus on getting cash out to pay for home remodeling or other home-related expenses, college tuition or debt consolidation. However, you don't have to take out the full amount you have available in equity.

You also don't need to have an existing FHA loan to qualify for an FHA cash-out refinance. This differs from the Simple and Streamlined Refinance, for which you must have an existing FHA loan.

What do I have to do?

Work with your lender to have your property appraised to see if you have enough equity in your home. You'll also have to prove your income and credit rating meet or exceed certain levels.

You need to finance or pay an upfront mortgage insurance premium plus pay an annual premium in your monthly payments

Cash-out refinances can take longer to be approved and may include higher closing costs than other types of FHA loans, so you'll need to be patient while waiting for your loan to close.

Refinancing from FHA to conventional loan 

In some cases, you may want to get out of your FHA loan and replace it with a conventional loan. Most people refinance to conventional loans to remove the annual mortgage insurance payment requirement or to increase the amount they can borrow against their equity.

How do I qualify?

• Prove that you meet credit and income requirements for that loan product
• Meet the minimum credit score requirement
• Work with your lender to have your property appraised to see if you have enough equity in your home

The benefits of refinancing from FHA to conventional loan

The main benefit of moving to a conventional loan is to remove the mortgage insurance requirement after you have at least 20% in equity. Depending on how high that insurance premium is, you may be able to reduce your overall payment. 

What do I have to do?

You must qualify for the new, conventional loan according to your lender's requirements. This could mean you'll have to provide paperwork to prove your income and assets. An appraisal is required.

Conventional loans may take more time, so you need to be patient. Plan ahead if you need to take your equity out as cash for an upcoming expense. A new mortgage rate and the ability to take out needed cash can make the more involved approval process worthwhile.

Refinancing may provide an obvious benefit such as a lower payment or a shorter loan term. You can learn more about refinancing and whether it is right for you by speaking with a Home Lending Advisor. Or, you can find out how to begin the mortgage refinancing process.