How to refinance an FHA loan
FHA offers several refinancing options
- A streamlined FHA loan offers the quickest path to lowering interest payments.
- A cash-out refinance loan cannot exceed 85 percent of the home’s value.
- It sometimes makes sense to refinance from a conventional loan to an FHA loan.
Federal Housing Administration (FHA) loans are among the most common government loans used to purchase homes, but using the FHA is a popular refinancing option as well.
The government-backed loan is especially attractive to younger borrowers with thinner credit. The program tends to accept borrowers with lower average credit scores and allows for more flexibility in its underwriting than is available through conventional loans purchased by Fannie Mae and Freddie Mac.
FHA loans are not originated by the government, however. A borrower will go to a bank or an FHA home mortgage lender to apply for an FHA loan. The FHA program guarantees the loan in case the borrower defaults. This guarantee means that the end-investors feel safer about funding the loans, which means FHA rates can be reasonably priced and affordable even for people with less-than-perfect credit.
The FHA also offers several refinancing options. The simplest and quickest is known as a streamlined refinance. This is an option open to borrowers with an existing FHA loan and essentially replicates the paperwork from the previous loan application.
With an FHA streamlined loan, the borrower is typically refinancing to lower the interest rate, or may want to convert an adjustable-rate mortgage to a fixed rate.
A streamlined FHA loan is designed to be relatively pain free for the borrower and typically can be done without income and credit verification. To qualify, a borrower must be able to demonstrate that the refinancing will lower monthly payments.
With a streamlined FHA refinance, a borrower may or may not have to seek an appraisal. If the borrower chooses to get an appraisal, they can roll the closing costs into the loan. Borrowers usually have to obtain an appraisal if the amount of the new loan exceeds the original loan’s balance.
Another type of FHA refinancing is a cash-out loan. In this case, the borrower can refinance either an FHA or conventional loan to pull out the accumulated equity in the home, which is built up by making regular loan payments over time or when home values rise. With a cash-out, a borrower will need to obtain an appraisal. The loan application also is more involved than a streamlined refinance. Typically. the loan cannot exceed 85 percent of the home’s value and the borrower must have lived in the home for at least a year before seeking a cash-out loan. Borrowers also can’t do multiple cash-out refinances in a single year.
A third type of FHA refinance is known as a replacement loan. In this case, a borrower is moving from a conventional loan to an FHA loan. Borrowers often choose to switch from an FHA loan to a conventional loan to avoid a special requirement of the FHA program that the borrower must pay an annual insurance premium for the entire life of the loan.
Switching from a conventional loan to an FHA loan also can make sense, however. For example, an FHA cash-out refinance potentially allows borrowers to pull out more equity than a conventional refinancing. Borrowers also may not be able refinance into another conventional loan, but may qualify for a new FHA loan. Compare FHA lender rates and terms, as similar to a cash-out loan, the FHA will require a lot of information from borrowers that demonstrates their income, credit history and employment.