FHA Loan Refinancing Options
Refinancing can be an excellent way to lower your monthly payment, shorten your loan term, change loan products, or even use cash from your home equity for remodeling, paying bills, and more.
For homeowners with FHA loans, there are several ways to approach a refinance, each with its own unique advantages and use cases. Just keep in mind refinancing may result in higher finance charges over the life of the loan.
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There are several ways to go about an FHA refinance. FHA homeowners can utilize any of the following options:
The two most common types of FHA refinances are the Cash-Out and Streamline.
Before moving forward with an FHA refinance, it’s essential to understand if you’ll be eligible and some of the requirements to meet. Here are some things to consider:
While the FHA has a minimum credit score requirement of 500, most lenders require something higher when you are looking to refinance. When using an FHA simple refinance or an FHA cash-out refinance, your credit score must be 580 or above. However, because credit scores usually aren’t checked when using an FHA Streamline refinance, your credit score has more flexibility.
The length of time you must keep your current FHA loan before refinancing depends on the type of refinancing you want.
In addition to time requirements, most refinance loans require you to have made at least 12 consecutive on-time payments, among other requirements.
Because an FHA Streamline refinance doesn’t require an appraisal, you could be able to refinance your loan even if you have negative equity in the home.
The FHA does not have a minimum or maximum income requirement when using an FHA loan. However, most lenders consider your income when making lending decisions and setting the interest rate. Most FHA Streamline refinances won’t require income verification unless your mortgage payment will increase by more than 20%. With other refinance types, your debt-to-income (DTI) must be 43% or lower.
Some types of FHA refinance loans allow missed payments in the past year, while others do not. Below is a short guide:
When refinancing an FHA loan, it’s essential to consider how much it costs compared to the savings. Here’s some information to help you determine if refinancing will make financial sense.
Like when you received your original loan, you will pay closing costs when refinancing. These can be anywhere from 2% to 6% of the loan amount. You will also be required to pay an Upfront Mortgage Insurance Premium (UFMIP) of 1.75% of the loan amount.
For example, if you have a loan amount of $250,000, your UFMIP will cost $4,375, which, in most situations, you can choose to pay at closing or roll into your loan.
It’s possible that refinancing your FHA loan could lower your monthly payments, but it would require certain things to happen.
An FHA mortgage refinance likely requires Mortgage Insurance Premiums, which come in two different types:
Closing costs for an FHA loan are comparable to those of other types of home loans. Expect to pay anywhere from 2% to 6% of the loan amount. However, some FHA lenders offer a no-closing-cost loan, which rolls the closing costs into the cost of the loan or eliminates closing costs in exchange for higher interest rates. Before deciding on the loan you’ll use, it’s important to look at the total cost.
If you want, you can roll the closing costs into your new FHA loan, spreading the costs out over the life of your loan. You can do the same with your UFMIP. However, it’s important to remember that when you finance your closing costs, you also pay interest on this amount, adding to the overall costs of your loan.
If you’re refinancing an FHA loan to something with a lower interest rate, you could immediately save on your monthly payment. However, because you need to pay closing costs and UFMIP, seeing an overall savings from refinancing takes time.
To understand how soon you’ll see net savings from refinancing, you’ll need to figure out your break-even point when the total savings equals the cost of refinancing. For example, let’s assume refinancing lowered your monthly payment by $150, and your closing costs were $4,500. This means your breakeven point would be 30 months.
Before moving forward with refinancing your FHA loan, it’s important to understand how the entire process works. Here’s a step-by-step guide on the process of refinancing an FHA loan.
Understanding your goals for an FHA mortgage refinance is an essential first step. What do you want to get out of the process? Do you want to lower your interest rate to lower your monthly payment? Do you want to move from a 30-year loan to a 15-year loan to pay off your home faster? Or maybe you want to take out some of the equity you’ve built up to complete a home improvement project. Understanding your goals helps you make the best decisions possible.
Now, it’s time to start researching your options. You can choose from an FHA streamline refinance, FHA simple refinance, FHA cash-out refinance, or another available refinancing option. However, what you choose should help you reach your goals.
Once you’ve picked a loan type, you must ensure you meet the FHA refinance requirements. With an FHA streamline refinance, you won’t need to go through a lengthy underwriting process, but you will need to show that you’ve made on-time mortgage payments. They require no late payments in the past six months and no more than one late payment in the previous 12 months.
If you want to use an FHA cash-out refinance, you can’t have any late payments in the previous 12 months, and you’ll need to have an 80% loan-to-value ratio after taking equity out. Additionally, you’ll need a credit score of at least 580 and a DTI of 43% or lower.
The requirements will be similar if you use an FHA simple refinance. You can’t have any late payments in the past six months and need a credit score of at least 580.
While most people gather the required documents after they apply for a mortgage, it’s best to get everything together beforehand. By doing so, you’ll already be prepared when your lender requests things like W-2s, 1099s, bank and investment statements, and anything else required for underwriting. The advantage of gathering documents early is that it helps speed up the closing process on your new loan.
Now it’s time to compare lenders and the rates they offer for the loan product you want. You might be tempted to solely compare the interest rates offered. However, this only gives you half the information needed. You should pay closer attention to the annual percentage rate (APR) since this tells you the interest rate and any fees the lender charges.
While some lenders offer attractive interest rates, they may also have much higher fees, making the loan more costly than other lenders. Always consider all the information provided before making a decision.
Now that you’ve picked your lender, you can complete the application and go through underwriting. Because you already put together all the necessary documents, it should speed up the process. However, if the underwriters request additional information, make sure you respond quickly, or you could delay closing.
The final step is to close your loan by signing all the necessary documents and paying the closing costs and UFMIP unless it’s included in your loan. When you refinance an FHA loan, you have a three-day period to choose to reconsider your loan.
Understanding the benefits and drawbacks of an FHA mortgage refinance is important. It allows you to determine if moving forward is in your best interest financially. Here are a few things to consider.
FHA refinance rates vary week by week, with the country’s overall economic state, the stock market, Federal Reserve policies, and more all playing a role in its fluctuation. Rates also vary by term. On a 30-year mortgage, borrowers typically pay a higher rate than those willing to repay their loan faster, say in 10 or 15 years.
To provide some clarity, look to resources like the Ellie Mae Origination Insight Report to see recent rate trends. Generally, average rates on FHA loans are comparable to average conventional mortgage rates.
Keep in mind that rates also vary from borrower to borrower. The rate you get quoted can depend on your credit score, your loan-to-value ratio, the amount you’re borrowing, the type of loan, and more. Talk to a reputable lender for a more accurate rate estimate.
If you’ve experienced bankruptcy or foreclosure, you can refinance an FHA loan, but you’ll need to follow a waiting period.
Typically, FHA loans are not available for investment properties. However, if you’re refinancing a multifamily unit, you can live in one of the units while renting out the others and use an FHA loan. You can move and rent the unit once you’ve lived in the home for one year.
FHA refinance options are available if you have a manufactured or mobile home. These include FHA Streamline, FHA cash-out, FHA Title I program, and FHA Title II program. You’ll need to follow the requirements for each loan program.
Typically, the FHA only allows you to have one FHA loan at a time.
It’s possible to refinance again after an FHA refinance, but you must adhere to a mandatory waiting period of 210 days. Additionally, it’s important to ensure that refinancing a second time will yield financial benefits.
Refinancing itself won’t reset your loan term to 30 years, but if you choose to refinance with a 30-year loan, it will reset your loan payback period to 30 years. Alternatively, you can move to a shorter loan term, like a 15- or 20-year loan.
When using an FHA loan, you must have mortgage insurance. After refinancing an FHA loan, you can remove mortgage insurance in three ways:
When you do an FHA mortgage refinance, it can affect your credit score in several ways.
When refinancing an FHA loan, you can switch lenders and pick whichever offers the best terms and interest rates.
FHA refinance rates are typically lower than conventional mortgage rates. However, when you add in mortgage insurance, borrowing costs are usually higher with an FHA loan.
