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FHA Loan Refinances: Requirements, Pros And Cons

February 22, 2024 8-minute read

Author: Katie Ziraldo

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

Whether you began with an FHA loan or you’re looking to refinance into one, there are options available for you. Let’s go over the pros and cons of different FHA loan refinance options.

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What Is An FHA Loan?

An FHA loan is a mortgage loan backed by the Federal Housing Administration (FHA). Government-backed mortgages like FHA loans offer some advantages when compared with conventional loans.

These loans are often easier to obtain for borrowers with higher debt-to-income ratios (DTIs) and lower credit scores because of less stringent qualification requirements. FHA mortgages can also have more lenient down payment requirements than other loan types.

How Does An FHA Refinance Work?

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

So, if you’re a homeowner looking to lower your interest rate or monthly payment, change your loan type and terms, or tap into your home equity, you may find yourself considering a refinance.

FHA Loan Refinance Options

Below, we go over four different types of FHA loan refinances. If the benefits of an FHA loan appeal to you, consider whether you qualify for the following FHA refinance options:

1. 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 straightforward refinance option offers homeowners the opportunity to lower their interest rate or their monthly mortgage payment.

The FHA Simple Refinance can also allow homeowners to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan, if preferred.

Refinance Requirements

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

Payment history is also considered. For you to be eligible, all your loan payments from the last 6 months must be up to date. A home appraisal will be completed to determine whether your home’s value has changed.

Pros Of An FHA Simple Refinance

  • Opportunity to finance closing costs: By lumping your closing costs into the overall loan amount, the upfront costs of refinancing are lower.

  • Opportunity to adjust your interest rate: This could mean obtaining a lower rate or switching from an ARM to a fixed-rate loan.

  • Opportunity to remove the co-borrower from the mortgage: If you purchased your home with another person who no longer needs to be on the loan, refinancing can offer you a chance to remove the co-borrower.

Cons Of An FHA Simple Refinance

  • Borrowers can’t 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 money and extend the refinancing process.

2. 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 payment.

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 more quickly.

Refinance Requirements

To qualify for an FHA Streamline Refinance, you’ll need to have an existing FHA loan with no outstanding monthly mortgage payments. You must not be within 210 days of the closing date of your original home loan. Specifically, you’ll have to meet these conditions for your mortgage payments:

  • No payments more than 30 days late in the last 6 months

  • No more than one payment more than 30 days late within the past 12 months

  • At least 6 monthly payments made on your existing mortgage.

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 can’t be higher than the rate on the current mortgage. The new monthly mortgage payment also can’t exceed the old payment by more than $50 per month.

Pros Of An FHA Streamline Refinance

  • Less strict mortgage lender requirements: Because the refinance is “streamlined,” this process requires fewer in-depth credit and income checks. In general, your lender may assume that if you’re able to pay your current monthly payment, you’ll probably be able to pay the new one.

  • No home appraisal required: Not having to wait for the home appraisal allows you to close on your refinance faster.

  • An option for homeowners 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.

Cons Of An FHA Streamline Refinance

  • 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 upfront, 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 (MIPs): FHA MIP is actually required on all FHA loans, but if you’re looking to get away from an MIP, refinancing into a conventional loan might be a better option.

Need extra cash?

Leverage your home equity with a cash-out refinance.

3. 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 refinance loan provides homeowners an opportunity to refinance their existing home loan into a new mortgage with a larger loan amount, receiving the difference in a lump sum payment.

Unlike the other FHA refinance options, 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.

Refinance Requirements

To qualify for this type of refinance, you’ll need to meet the following borrower requirements:

  • A minimum credit score of 580

  • A DTI at or below 43%

  • No late mortgage payments during the last 12 months

  • Residency in your house for at least 12 months

In addition to these requirements, there are loan-to-value ratio (LTV) limits to keep in mind. These limits control how much equity you need to keep in your home compared with 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 your home.

Pros Of An FHA Cash-Out Refinance

  • 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 lower your 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 many projects.

Cons Of An FHA Cash-Out Refinance

  • 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’ll 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.

4. FHA 203(k) Refinance

Also known as a mortgage rehabilitation or renovation loan, an FHA 203(k) loan 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.

  • Limited 203(k) refinance: This refinance option lets you borrow up to $35,000 toward qualifying home improvements with no minimum spend. The limited FHA 203(k) refinance only covers uncomplicated surface-level repairs, like new flooring.

  • Standard 203(k) refinance: This FHA 203(k) refinance has no price cap but requires the homeowner to spend at least $5,000 on home projects. The standard option covers major home improvements, such as structural repairs.

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

Refinance 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.

A home appraisal will also be required for an FHA 203(k) refinance. It’s important to note that the FHA has specific rules about the types of home improvements that can be covered with this refinance option.

Pros Of An FHA 203(k) Refinance

  • Less strict credit score requirements: 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 with 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 alternative home improvement loan

Cons Of An FHA 203(k) Refinance

  • The approval process can be longer than with other types of refinances: Due to the specific parameters surrounding which home improvement projects can be financed, the process can take more time, and borrowers may experience delays.

  • Borrowers can’t use this option for 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

Are you interested in learning 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 a home before refinancing varies among 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 you to occupy the home for at least 12 months.

Can I refinance a 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. This means borrowers can refinance a conventional mortgage into an FHA loan.

Can I refinance an FHA loan into a conventional loan?

It’s possible to refinance an FHA loan into a conventional loan. Homeowners may choose to do this to avoid paying 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 you have 20% equity in your home.

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 associated with each refinance program to choose the one that’s best for you.

Are you ready for an FHA refinance or other refinancing option? Start the approval process today to see how you qualify.

Find out if an FHA loan is right for you.

See rates, requirements and benefits.

Katie Ziraldo Headshot

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.