Refinance Options When You Have an FHA Loan

There are dozens of reasons you might want to refinance your mortgage loan. For one, it could help you lower your interest rate, thus lowering your monthly payment (plus the total interest you pay over the course of your mortgage).

Additionally, you can also refinance to pay your loan off faster, to access cash, to consolidate other debts, or even to get rid of mortgage insurance.

Are you considering a refinance for any of these reasons? If you have an FHA loan, there are four ways you can make it happen:

FHA Streamline Refinance

The FHA Streamline Refinance program is designed to offer FHA borrowers a quick and easy route toward refinancing. It requires minimal documentation, no credit check, no income verification, and no home appraisal. The no-appraisal feature is a huge benefit if you live in an area where home values have decreased significantly since your home purchase.

To be eligible for an FHA Streamline, you’ll need to:

• Be current on your mortgage loan for at least the last three months
• Have made all payments on your current loan on time for the last six months
• Be at least 210 days past your closing date
• See a “Net Tangible Benefit” from the refinance

The one downside to the FHA Streamline is that you can’t roll your closing costs into the loan. These will need to be paid in cash at closing. Depending on the lender, closing costs may be reduced significantly on FHA Streamlines.

FHA Cash-out Refinance

An FHA cash-out refinance is an option 1) if you have equity in your home or 2) if your home has increased in value since you purchased it. The program allows you to refinance in a loan larger than your current mortgage balance, taking the difference between the two numbers as a lump-sum cash payment. This cash can be used toward home improvements, college tuition, to pay off debts, or for other expenses you might be dealing with.

To qualify for an FHA cash-out refinance, you must:

• Have more than 20% equity in the house (your maximum loan can only be 80% of the home’s value)
• Have made your last 12 months of mortgage payments on time
• Get your home appraised by a HUD-approved appraiser (your mortgage lender will arrange this)

Keep in mind that a cash-out refinance will increase your total mortgage debt, which could mean a higher monthly payment and a longer repayment period.

FHA Simple Refinance

The Simple Refinance program is similar to the Streamline one, though it requires a more thorough look at your income, credit, and finances. It also requires a home appraisal. Overall, the Simple Refinance functions most like the traditional mortgage process, with a credit check, income verification, and a deep dive into your income and debts.

To qualify for an FHA Simple Refinance, you must:

• Have made all payments on your current loan on time for the last six months
• Be at least 210 days past your closing date
• Get your home appraised by a HUD-approved appraiser
• See a “Net Tangible Benefit” from the refinance

The upside of the FHA Simple Refinance is that it allows you to finance most of your closing costs, rolling them into your loan balance instead of paying them up-front. This is the big differentiator from the Streamline program.

Refinance into Another Loan Product

Your last option is to refinance out of an FHA loan and into another loan product. Since FHA loans carry mortgage insurance premiums (often for the life of the loan), refinancing to another loan product can help you avoid MIP and lower your monthly payments as a result.

As an FHA borrower, you may be able to refinance into one of these loan products:

• Conventional loan – A conventional loan can help you avoid up-front and lifetime MIP, and with a 20% down payment, you can avoid annual premiums, too. Keep in mind that conventional loans require higher credit scores than other mortgage options. 

• VA loan – VA loans require no down payment, no mortgage insurance, and put a cap on your closing costs. They’re only available to veterans, military members, and their qualifying spouses. 

• USDA loan –  If your home is in a qualifying rural area, you can refinance into a USDA loan. These also require no down payment and do not require mortgage insurance.

As you can see, there are several ways you can refinance as an FHA borrower, and the right option really depends on your goals with the refinance, as well as your unique financial situation. If you’re considering refinancing your FHA loan but aren’t quite sure how to go about it, get in touch with Embrace Home Loans today. Our loan experts are here to help.