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FHA Loan Refinances: Requirements And Benefits

Katie Ziraldo8-minute read

November 21, 2022

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If you’re in the market for a home refinance, you might have come across FHA refinance options during your search. But what exactly are these options and how do they differ from a conventional refinance?

First and foremost, an FHA loan is a mortgage loan backed by the Federal Housing Administration. Government-backed loans have a few advantages when compared with conventional loans, including the fact that the loan may be easier to obtain for those with higher debt and lower credit scores due to less stringent qualification requirements.

Whether you began with an FHA loan or you’re looking to refinance into an FHA, there are options available for you, so let’s get into them!

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FHA Loan Refinance Options

Before we break down the specific refinance options available for FHA loans, it’s important to briefly touch on how a refinance works. When you refinance your mortgage, you are essentially swapping out your existing home loan for a new one, often taking on new loan terms in the process.

So, if you’re a homeowner looking to lower your rate or monthly payment, change your loan type and terms or tap into your home equity, you may find yourself considering a refinance. Each of these driving factors can present a case for a refinance – but how do you know which refinance option is right for your situation?

If the benefits of an FHA loan appeal to you, consider the following FHA refinance options.

FHA Simple Refinance

An FHA Simple Refinance is a viable option for homeowners who originally purchased their home with an FHA loan. As the name implies, this refinance option is as simple and straightforward as they come, offering homeowners an opportunity to lower their interest rate or their monthly mortgage payments. This can also allow the homeowner to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan, if preferred.

Requirements

Qualifying for an FHA Simple Refinance means meeting certain requirements, including credit score and income limits. Typically, a credit score of 580 is required to qualify.

Payment history is also considered, as borrowers must be up to date with all loan payments from the last 6 months to be considered eligible. An appraisal of the home will also need to be completed to determine how the home value has changed.

Benefits

  • Opportunity to finance closing costs: By lumping these costs into the overall loan amount, the upfront costs of refinancing are lessened.
  • Opportunity to adjust your interest rate: This could mean obtaining a lower rate or switching from an ARM to a fixed-rate loan.
  • Can be used to remove co-borrowers from the mortgage: If you purchased your home with another person who no longer needs to be on the loan, refinancing can be an opportunity to remove them.

Drawbacks

  • No opportunity to take money out: The FHA Simple Refinance option does not come with a cash-out feature, so if you’re looking to tap into home equity, this isn’t the best option.
  • Borrowers will have to get a home appraisal: To determine your home’s value, an appraisal will be required. This can take time and delay the refinancing process.

FHA Streamline Refinance

Much like the Simple Refinance option, the FHA Streamline Refinance is available to homeowners with existing FHA loans who are looking to lower their interest rate and monthly payments.  

But unlike the Simple Refinance option, the Streamline Refinance may not require an appraisal or an in-depth credit report, allowing the process to move at a faster pace.

Requirements

To qualify for an FHA Streamline Refinance, you’ll need to have an existing FHA loan and be current on your monthly mortgage payments. Specifically, you cannot qualify for this option if you’ve had any payments more than 30 days late in the last 6 months or more than one payment more than 30 days late within the last 12 months. In addition, you’ll need to have made at least six monthly payments on your existing mortgage and a minimum of 210 days must have passed since the closing date on the original loan.

FHA Streamline Refinances also have a requirement surrounding net tangible benefit, which refers to the financial advantage gained by the borrower with a refinance. This means that for the FHA to approve the refinance, it needs to be quantifiably beneficial to you as the borrower. For example, if you’re reducing the length of your loan term, the new interest rate cannot be higher than the rate on the current loan and the new monthly mortgage payment cannot exceed the old payment by more than $50 per month.

Benefits

  • Less strict mortgage lender requirements: Because the refinance is “streamlined,” this process requires less in-depth credit and income checks. In general, the lender assumes that if you’re able to pay your current monthly payment, you’ll probably be able to pay the new one.
  • No required appraisal: Once again, this eliminates a step in the process and allows you to close on your refinance faster.
  • Refinance option for those who owe more than their home is worth: Even if you owe more on your mortgage than your home’s value, this is one of the few types of refinances you can still take advantage of.

Drawbacks

  • Closing costs must be paid upfront: Unlike a Simple Refinance where you can lump these straight into the loan, an FHA Streamline Refinance requires the borrower to pay closing costs, which are typically 2% – 6% of the loan amount.
  • Limited cash-out opportunity: With this refinancing option, borrowers can only take out up to $500 from their home equity.
  • Borrowers have to pay mortgage insurance premiums (MIP): This is actually a requirement on all FHA loans, but if you’re looking to get away from required mortgage insurance, refinancing into a conventional loan might be a better option.

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FHA Cash-Out Refinance

If you’re interested in converting your home equity into cash, an FHA cash-out refinance could be a great option. The FHA cash-out refi provides an opportunity for homeowners to refinance their existing home loan into a new mortgage with a larger loan amount, then receive the difference in a lump sum payment.

Unlike the other options discussed in this article, an FHA cash-out refinance is a viable option for homeowners even if their existing mortgage is a different type of home loan. For example, a homeowner with a conventional loan could opt to refinance with an FHA cash-out refi because the lower credit score requirements make it easier for them to qualify.

Requirements

To qualify for this type of refinance, you’ll need a minimum credit score of 580 and a debt-to-income ratio (DTI) at or below 43%. You also cannot have had any late mortgage payments over the previous 12 months and need to have lived in the residence for at least that long.

In addition to these qualification requirements, there are loan-to-value ratio (LTV) limits to keep in mind as well. These limits control how much equity you need to keep in your home compared to its current value. With a cash-out refi, your LTV cannot exceed 80% of your home’s value, meaning you’ll need to keep at least 20% equity in the home.

Benefits

  • Potential for lower monthly payments: In addition to tapping into home equity, a cash-out refi could mean obtaining a better interest rate, which could mean lower monthly mortgage payments.
  • Lump sum payment can be used for almost anything: From home repairs to debt consolidation and emergency funds, the cash you receive from a cash-out refinance can be used toward a number of pressing projects.

Drawbacks

  • Increased loan amount: Cashing out your home equity means taking on additional debt in the form of a higher loan amount. It’s important to consider both the short and long-term impact of this decision to determine if it makes sense for you.
  • Required MIP payments: If you’re refinancing from a conventional loan into an FHA loan with an FHA cash-out refinance, note that you will be required to pay a mortgage insurance premium.
  • Required home appraisal: Unlike a Streamline Refinance, a home appraisal will be required for a cash-out refi to determine the precise value of the home.

FHA 203(k) Refinance

Also known as a mortgage rehabilitation or renovation loan, an FHA 203(k) refinance allows homeowners to roll home improvement and renovation costs into their home loan.

There are two options available: the limited 203(k) refinance and the standard 203(k) refinance. While the limited refinancing option provides up to $35,000 to be used toward qualifying home improvements with no minimum spend, the standard refinancing option has no price cap, but requires the homeowner to spend at least $5,000 on home projects. Additionally, the limited option covers only surface level, uncomplicated repairs, such as new flooring, while the standard option covers major home improvements, such as structural repairs.

Rocket Mortgage® does not offer 203(k) loans at this time.

Requirements

Like the cash-out refinance, you don’t have to begin with an FHA loan to take advantage of an FHA 203(k) Refinance. Homeowners with all loan types can leverage this option, though they’ll need to meet certain qualification standards like credit score and DTI minimums.

An appraisal will also be required, and it is important to note that the FHA also has specific rules about the types of home improvements that can be covered with this loan.

Benefits

  • Less strict credit score requirements: As we’ve mentioned, FHA loans often have less stringent qualification requirements than other types of loans, making it easier for borrowers to get the financing they need when they need it.
  • Lower interest rates compared to other home improvement loans: If you have important home repairs and remodels planned, it will likely cost you less in the long run to finance them with an FHA 203(k) loan when compared with the alternatives.

Drawbacks

  • The approval process can be longer than other types of refinances: Due to the specific parameters surrounding which home improvement projects can be financed, the process can experience delays.
  • Borrowers can’t use this option on investment properties: Unlike some other refinancing options, the FHA 203(k) Refinance can only be used for primary residences.
  • Borrowers might have to hire a HUD consultant: Depending on the type of repairs you have planned, the terms of your loan might require you to consult with someone from the Department of Housing and Urban Development (HUD) for approval.

FHA Refinance FAQs

Looking to learn more about FHA refinances? Let’s explore some of the most frequently asked questions on the topic.

When can I refinance an FHA loan?

The specific amount of time you are required to live in the home before refinancing varies between the different types of home loans. With both an FHA Simple and FHA Streamline Refinance, you’ll need to have lived in the home for 6 months to qualify, while an FHA cash-out refinance requires 12 months in the home.

Can I refinance my conventional loan into an FHA loan?

While FHA Simple and FHA Streamline Refinances are only available to homeowners with existing FHA loans, both the FHA cash-out refinance and FHA 203(k) refinance options are available to homeowners with all loan types, meaning borrowers can refinance a conventional mortgage into an FHA loan.

Can I refinance out of an FHA loan?

It’s possible to refinance an FHA loan into a conventional loan. A homeowner may choose to do this if they want to avoid having to pay a mortgage insurance premium (MIP), which is required on all FHA loans. With a conventional loan, a different type of mortgage insurance called private mortgage insurance (PMI) is required, but only until your loan balance reaches 80% of the home’s value.

The Bottom Line

If you’re interested in capitalizing on all the benefits of an FHA refinance, know that there are several options you should consider. Think about your short- and long-term goals alongside the various pros and cons of associated with each refinance program to choose the one that is best suited for your needs.

If you’re ready to begin your refinance, start the approval process today to discover your FHA refinance rates!

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See rates, requirements and benefits.

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Katie Ziraldo

Katie Ziraldo is a financial writer and data journalist focused on creating accurate, accessible and educational content for future generations of home buyers. Her portfolio of work also includes The Detroit Free Press and The Huffington Post.