How To Refinance Your FHA Loan

An FHA loan is a government-backed mortgage insured by the Federal Housing Administration and issued by an approved lender. FHA loans generally have more lenient financial requirements than conventional loans, and you can even refinance an FHA loan to another loan or cash out on your home’s equity.

Before you can refinance, you’ll need to review your FHA loan refinance options and determine what makes the most sense for your situation.

Can You Refinance An FHA Loan? 

Yes, you can refinance your FHA loan into another home loan or take cash out if you’re eligible and have enough equity built into your home. If you’re unfamiliar with refinancing, it refers to the process of replacing your current mortgage with a new one. Some of the key reasons homeowners refinance an FHA loan include locking in a lower interest rate, switching from an adjustable-rate mortgage to a fixed-rate mortgage (or vice versa), making the mortgage term shorter or longer, canceling FHA mortgage insurance premiums (MIPs) or taking cash out to pay down debt or finance home improvements.

To qualify for an FHA refinance, you’ll need to meet the lender’s minimum requirements. Most lenders require a credit score of 580 or higher as well as a certain amount of equity in the home. There are also maximum debt-to-income (DTI) limits and payment history is also considered. Additionally, the lender will order an appraisal to determine the value and condition of the home.

Options For Refinancing An FHA Loan

If you want to refinance your FHA loan, you have several options. Let’s examine each possible choice and how it could affect your finances.

Refinancing FHA Loans To Different Loans

You can refinance your FHA loan to a different type of home loan. For example, let’s say you choose to refinance to a conventional loan. Depending on your loan-to-value (LTV) ratio, you can potentially avoid paying MIP. However, your interest rate may increase, and there are stricter eligibility requirements for a conventional loan. Lenders typically require a minimum credit score of 620 and a maximum DTI of 50%. If you have less than 20% equity in your home, you may also be required to pay private mortgage insurance (PMI) until you build up enough equity.

Another option is to switch from a fixed- to an adjustable-rate mortgage (ARM). This can potentially lower your mortgage payments and your interest rate in the short term. Keep in mind that ARMs usually have a lower interest rate during the introductory period. After this period ends, the interest rate may go up or down according to the benchmark rate, which fluctuates based on market conditions. If interest rates go up, your ARM payment will be more expensive.

FHA Streamline Refinance

An FHA Streamline Refinance allows you to lower your interest rate or change your loan term through a simplified underwriting process. Because there’s less paperwork and verification involved, this type of refinance typically closes more quickly than other types. To qualify, your current FHA loan must have closed at least 210 days before you applied to refinance.

If your credit score has significantly improved since you originally took out your mortgage, consider a credit qualifying FHA Streamline Refinance. This requires the lender to verify your income and check your credit report and DTI ratio. Qualifying with a higher credit score could help lower your interest rate.

FHA Cash-Out Refinance

With an FHA cash-out refinance, you can refinance your existing FHA loan and cash into your home’s equity at the same time. Similar to a conventional cash-out refinance, the FHA cash-out refinance allows you to borrow more than you owe on your mortgage and pocket the difference in cash. You can use this money on almost anything, such as paying off high-interest credit card debt, home remodeling, college tuition or other reasons.

The FHA requires a minimum credit score of 500, but most private lenders have their own credit score requirements. For example, Rocket Mortgage^® requires a credit score of at least 620 if you’re doing an FHA cash-out refinance. You must also have occupied your home for at least 12 months and have all mortgage payments up to date.

FHA 203(k) Refinance

An FHA 203(k) loan allows you to purchase, refinance and fund renovations under a single mortgage. With a 203(k) loan, you can cash out equity to use on repairs. There are two types of 203(k) loans: Limited and Standard. Limited is recommended if the home is habitable and requires renovations costing no more than $35,000. A Standard 203(k) loan applies to homes that are not habitable.

To qualify for maximum financing, you will need a credit score above 580. Credit scores between 500 and 579 are limited to a maximum 90% LTV. The FHA also has strict restrictions on what you can put the funds toward. For example, you cannot use the funds to pay for cosmetic upgrades.

Pros And Cons Of Refinancing An FHA Loan

As always, there are advantages and disadvantages to refinancing an FHA loan.

Pros

• You can switch to a different type of mortgage.
• You can change or lower your monthly payment.
• You can borrow cash from your home’s equity.
• You can get rid of mortgage insurance premiums (MIP).
• You can potentially save on interest costs.

Cons

• You’ll have to pay closing costs, as well as other refinancing costs.
• You could possibly raise your monthly payment.
• A cash-out refinance will lower your home’s equity.

FAQs About Refinancing An FHA Loan

Below are the most frequently asked questions about refinancing an FHA loan.

How soon can I refinance an FHA loan?

You must meet “seasoning requirements” before you can refinance your FHA loan. You must have made 6 payments on the FHA-insured mortgage that is being refinanced; at least 6 months must have passed since the first payment due date on the FHA loan that is being refinanced; and at least 210 days must have passed since the closing date.

Is it hard to refinance an FHA loan?

It’s not hard to refinance an FHA loan, but you’ll need to meet the lender’s minimum requirements. To be approved, you will likely need a credit score of at least 580 as well as meet the lender’s maximum debt-to-income (DTI) limits, have a certain amount of equity in your home and have up-to-date mortgage payments.

How much does it cost to refinance a FHA loan?

In general, you can expect closing costs to range between 3% – 6% of the total loan amount. These costs are paid upfront on closing day.

FHA Refinance Loan FAQs

Still confused about FHA refinances? Here are a few frequently asked questions and their answers to help clear up any confusion. 

Is it worth refinancing from an FHA loan to a conventional mortgage? 

Switching to a conventional mortgage from an FHA loan could be beneficial, as long as you have a high enough credit score and enough equity in your home. You might be able to decrease your interest rate, lengthen your loan term and decrease your monthly payment, though this isn’t always the case. If you’ve improved your finances since you got your FHA loan and are considering refinancing to a conventional loan, it’s a good idea to contact a financial advisor to determine whether this would be a beneficial move for you. 

Can I get an FHA loan twice in a row? 

A home buyer can only use one FHA loan at a time. However, if the first mortgage is paid in full, the borrower can use an FHA loan for their next purchase. The Department of Housing and Urban Development (HUD) does have exceptions for this rule. Depending on your circumstances, you may be able to get another FHA loan while still paying on a previous one. If you’ve had a job relocation, an increase in family size or other circumstances, you may be granted permission to apply for a second FHA loan. For more details on whether or not you could qualify, check out the FHA’s website.

Do FHA loans have prepayment penalties? 

Since FHA loans are backed by the Federal Housing Administration and are focused on reducing the costs of homeownership, borrowers don’t have to pay prepayment penalties. In fact, they’re not allowed.

The Bottom Line

You can refinance an FHA loan to take cash out, change the loan term and interest rate or switch to a different type of loan. Before you start the process, you’ll need to find a participating lender and meet their requirements.

Ready to refinance your mortgage? Start the refinance process today to find out what interest rate and terms you qualify for.