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.
