Understanding the FHA Refinance: Guidelines and Options

July 9, 2020

Understanding the FHA Refinance: Guidelines and Options

Since 1934, the Federal Housing Administration (FHA) has been helping people become successful homeowners. The FHA mortgage is insured by the Federal Government so that lenders can provide single family mortgages with flexible credit qualifying requirements and loan terms such as low-down payment, low interest rates and low closing costs. FHA mortgages are as popular as ever with homeowners and first-time homebuyers.

The FHA also offers great refinancing options, whether you’re an existing FHA borrower or not. If you’re thinking about a refi, an FHA refinance might be right for you. Check out these FHA refinance options and how you may qualify for each.

FHA Streamline Refinance

An FHA streamline refinance is for existing FHA loan borrowers to capitalize on low rates by refinancing quickly and efficiently, earning the name “streamline.” There’s a lot to love about this option. It has reduced credit and underwriting requirements, no income or employment verification, and no appraisal needed. Closing costs are not included in loan amount but may be offset by lender credits that are offered with this popular program.

Here are the eligibility requirements of an FHA streamline refinance:

  • You are refinancing your primary residence.
  • You have made your mortgage payments on time for the last six months.
  • It has been at least six months since the first payment due date of your current FHA loan.
  • At least 210 days have passed since the closing date of your current FHA loan.
  • The refinance must result in a demonstrated financial net tangible benefit (NTB) to you, such as a lower payment or shorter loan term.

FHA Simple Refinance

A Simple Refinance is a rate and term refinance of an existing FHA mortgage that allows you to include the closing costs in the Loan Amount. The Simple Refinance requires credit qualification, full documentation of income and employment and a home appraisal. 

 

Program benefits include:

 

  • Co-borrowers from original mortgage can be removed.
  • New loan does not have to meet net benefit requirement.
  • Maximum loan-to-value (LTV) ratio of 97.75%
  • Reduced Upfront Mortgage Insurance Premium from unused UFMIP credit from previous FHA Mortgage with less than 3 years seasoning.
  • There are no mortgage seasoning requirements for existing FHA Mortgage (compared to six months seasoning required by the Streamline Refinance).

FHA Rate & Term Refinance

Rate and Term Refinance is a “no cash-out” refinance of an FHA mortgage where all proceeds are used to pay existing mortgage liens (on the property being refinanced) and costs associated with the new refinance transaction. This type of refinance can be used to buy out a title holder’s equity (for example, a divorce) or payoff recorded land contract.

 

Program benefits and requirements include:

 

  • Co-borrowers from original mortgage can be removed.
  • No net tangible benefit requirements.
  • Maximum loan-to-value (LTV) ratio of 97.75%.
  • Other liens that are being paid with proceeds of refinance be at least 12 months old.
  • Reduced Upfront Mortgage Insurance Premium from unused UFMIP credit from previous FHA Mortgage with less than 3 years seasoning.
  • There are no mortgage seasoning requirements for existing FHA Mortgage (compared to six months seasoning required by the Streamline Refinance).

Cash-Out for New and Existing FHA Borrowers

An FHA cash-out refinance is an option for both existing FHA loan borrowers and conventional loan borrowers looking to cash-out into an FHA loan. Here, you would refinance your existing loan and access the remaining equity in the form of cash.  This type of refinance has more requirements.

Eligibility requirements of an FHA cash-out refinance include:

  • Owner-occupied (property is your primary residence) at least 12 months prior to application date.
  • No late payments in last 12 months.
  • Maximum loan-to-value (LTV) ratio of 80%, or cash-out with as little as 20% equity.
  • Maximum debt-to-income (DTI) ratio to qualify is 43%.
  • Pay an upfront mortgage insurance premium, and then a monthly insurance payment.
  • A home appraisal must be completed.
  • Six-month seasoning requirements for mortgage liens being paid off

So, if you’re looking to get your hands on cash to go toward things like credit card debt, college tuition, home improvement projects, and more, an FHA cash-out refinance could be the answer.

Refinancing an FHA Loan into a Conventional Loan

If you’re an FHA borrower, you’re not limited to only refinancing into another FHA loan. As you pay down your mortgage (and if your home value has risen), you may have enough equity to refinance out of an FHA loan and into a conventional loan, like a fixed rate or adjustable rate mortgage (ARM). Though conventional loan rates are slighter higher, your mortgage insurance payments may be much less than those of an FHA loan. Plus, in some cases, FHA loan insurance is permanent, and that is not always the case for a conventional loan.

Refinancing a Conventional Loan into an FHA Loan

Refinancing into an FHA loan from a conventional one is a great option for those homeowners who would like to refi, but don’t have a stellar credit score to qualify for a conventional refinance. Your rate could be lower with an FHA loan, but you will have to pay mortgage insurance, potentially for the life of the loan.

Now that you’re familiar with some of the basic guidelines of an FHA refinance and what it can offer you, find the refinance option that’s right for you. Get in touch with NewRez’s team of mortgage experts to learn more.

For more helpful tips and information on refinancing, be sure to check out our blog and our refinance calculator.