Loan refinancing can save you money, but can also cost you money via the appraisals, application fees, closing costs, etc., therefore, you must determine whether it’s a wise financial decision before you can move forward with refinancing.
Refinancing in the context of FHA loans is also an avenue that borrowers can pursue. Does that mean that an FHA loan be refinanced?
Yes, a Federal Housing Administration insured mortgage loan can be refinanced later, and borrowers can even do a streamline refinance, which involves less paperwork and no home appraisal.
There are various reasons why borrowers might want to refinance their FHA loan down the line, but the good news is that government-backed mortgages can be refinanced just as conventional ones.
In this article, I’m going to talk about FHA mortgage refinancing, the requirements borrowers must meet to refinance their FHA loan, and the advantages of streamline refinancing.
Can I Refinance My FHA Loan?
Before I delve into the requirements of FHA loan refinancing and the advantages offered by the streamline refinancing, let’s see what mortgage refinancing is.
Basically, when you refinance a mortgage loan, you are applying for a new loan and you’re using the borrowed money to pay off your original loan.
The objective of refinancing is usually to qualify for a loan with more favorable conditions than your current loan.
While the primary objective is to secure a lower mortgage rate and save money in the long run, some borrowers may use loan refinancing for the following reasons:
- Converting some of the home’s equity to cash (cash-out refinancing);
- Switching from an unpredictable adjustable-rate mortgage loan to a more predictable fixed-rate loan.
Therefore, you can refinance your FHA loan just as you would refinance any conventional loan, i.e. loans that are not government-backed.
If you’re looking to refinance your FHA loan, you must meet the minimum requirements of the lender, which can vary from one bank to the next.
The lender may have certain credit score requirements that you must meet, or you’re required to have certain equity in your home to qualify.
FHA Loan Refinancing Options & Requirements
FHA refinancing is only available to homeowners who are currently using their home as their principal residence.
Borrowers who want to refinance their FHA loans have several options available. Some of the most common ones include:
1. FHA Cash-Out Refinance
A cash-out refinance can be a smart option for homeowners whose property has increased in market value since their home was purchased.
By taking out another mortgage for more than what they currently owe, homeowners can refinance their existing mortgage.
However, to qualify for the FHA cash-out refinance, borrowers will need at least 20% equity in the property, which will be determined by a new property appraisal.
Basically, a cash-out refinance allows borrowers to get access to money they have in an illiquid asset and use that money for various other purposes such as paying off other high interest loans, home improvements, college tuition, student loan debt or home remodeling.
Lenders will require documentation to prove that the borrower has made all the monthly payments on time in the last 12 months.
Of course, borrowers must meet the credit score requirements of FHA loans, the debt-to-income ratio guidelines, and the loan-to-value guidelines (maximum loan-to-value set at 80 percent of the home’s current value).
2. FHA Simple Refinance
The simple refinance or “rate-and-term refinance” allows borrowers to go from one FHA mortgage loan to a new one, regardless of the nature of the current FHA loan (fixed-term or adjustable rate mortgage).
Ideally, when doing so, borrowers will consider aspects such as lowering their monthly payments by getting a lower interest rate, switching to a fixed-rate mortgage from an ARM.
The simple refinancing option does not offer the possibility for cash-out, although this too is something that borrowers consider when moving forward with their home refinancing.
3. FHA Rehabilitation Mortgages
When buyers purchase a home that is in need of renovations either because it’s old or it’s simply not in its best shape, they can use the FHA 203(k) Rehabilitation Loan to purchase or refinance a home as well as the rehabilitation of the property.
This type of financing can be used for various renovation or rehabilitation purposes including structural alterations and constructions, changes to the appearance of the home, modernization works, elimination of health and safety hazards, landscape works and other site improvements, enhancing accessibility for a disabled person, making energy conservation improvements, replacing or reconditioning plumbing, roofing, gutters, floors, etc.
Therefore, homeowners with properties in need of rehabilitation, modernization or renovation can use FHA rehab mortgages to finance these types of work.
4. FHA Streamline Refinance
The reason this refinancing option is name “streamlined” refinancing is because it allows borrowers to reduce the interest rate of their current loan quickly. What’s more, they can even do so without an appraisal.
This saves borrowers money, but also time by reducing the amount of paperwork and documentation requirements.
To qualify for this type of refinancing, borrowers must meet the following requirements:
- Borrowers must have an existing FHA-insured mortgage;
- Borrowers must have had their existing mortgage for at least 210 days before they can apply for the streamline refinance option;
- Borrowers must prove a tangible benefit by going ahead with the streamlined option.
Although it’s possible to refinance from a conventional loan to an FHA backed loan, the streamline financing loan is only available to borrowers with a current FHA-insured mortgage loan. Another important requirement is that borrowers must have made on-time payments in the last 6 months.
Streamline Refinancing Advantages
The Department of Housing and Urban Development has created a special program for borrowers that are looking to refinance their FHA-insured home.
This is the streamline refinancing that I mentioned earlier. There are several advantages, but also some requirements borrowers must meet to qualify and to take advantage of this refinancing program.
Streamline refinancing requires less documentation, which saves borrowers a lot of time, allowing them to move forward quickly with their refinancing.
Another advantage is the fact that borrowers may be able to skip the appraisal process altogether, which is always compulsory with conventional or FHA loans.
The stronger your application is (the more closely you meet the streamline refinance requirements), the more chances for you to get a waiver of the appraisal.
The minimal documentation and no income verification coupled with the appraisal waiver makes this type of refinancing a quickly achievable one.
FHA streamline refinancing offers the following other advantages to borrowers:
- Lower monthly payment;
- Lower interest rate;
- Lower mortgage insurance rate;
- No loan-to-value limits.
As I mentioned above, there are also requirements that borrowers must meet in order to get approved for streamline refinancing.
The requirements of streamline refinancing are as follows:
- Borrowers must have a current FHA-insured mortgage;
- Borrowers must be past the 210-day waiting period (after closing your home);
- Borrowers must be current on their mortgage payments (no late payments in the last 6 months);
- The refinancing must produce a tangible benefit to the borrowers;
- Borrowers should ideally have a FICO score of 620 or above.
A misconception about streamline refinancing is that borrowers are not required to pay closing costs. This is not true since there is no reduction or elimination of closing costs. The term streamlined only refers to the fact that less paperwork is required with this type of refinancing.
When to Refinance Your Loan?
A refinancing is worth considering when:
- You’re paying a higher interest rate compared to current available rates;
- Your mortgage insurance premium percentage is higher than current MIP rates;
- If your home’s value has changed;
- You’re struggling to make mortgage payments;
- You can shorten the loan term;
- When changing to a fixed rate mortgage from an ARM results in a lower interest rate;
- When needing to tap into home equity to finance a larger purchase or expense;
- When consolidating debt, etc.
Not all refinancing options and reasons are always advantageous in the long run. For example, without exercising financial prudence in the long run, refinancing to consolidate a debt only to accrue even more debt in the future may not be a good idea.
Therefore, you must always weigh the pros and cons of refinancing and understand the long-term effects as well.
To get back to the main question in this article, namely if borrowers with an FHA loan can refinance their loan, the answer is a resounding yes, provided that they meet the lender’s requirements.
In fact, refinancing an FHA-backed loan may be even easier thanks to the streamlined refinancing option, which requires both less documentation and borrowers might be able to skip the appraisal as well.
There are various refinancing options you can pursue, depending on your situation and your refinancing goal, but do make sure you understand how each option operates and consider their disadvantages too.
All in all, you can refinance an FHA loan just like you would refinance a conventional one and enjoy the benefits that the type of refinancing you choose will offer.