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While many people assume that the only reason to refinance a mortgage is when interest rates drop, you can actually accomplish multiple financial objectives by refinancing.
Homeowners with FHA loans may qualify for several Federal Housing Administration programs. Each of these FHA refinance loans has its advantages and can help you achieve specific goals.
Dig deeper: Is now a good time to refinance your mortgage?
In this article:
Why refinance an FHA loan?
Whether you’re hoping to lower your monthly payments with the help of a better mortgage rate or a new loan term or shorten your loan term to pay off your home faster, an FHA refinance loan may be the tool for reaching your goal.
Many homeowners choose to refinance to pay for home improvements. If you want to pay for a renovation by refinancing, you can consider an FHA cash-out refinance or an FHA renovation loan.
Other reasons to refinance an FHA loan are to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan or to remove a co-borrower from your mortgage loan. You may also consider an FHA cash-out refinance to pay off other high-interest debt.
Read more: How soon can you refinance your mortgage after buying a home?
FHA refinance requirements
When you refinance a mortgage, you are swapping one loan for another. That means you must qualify for the new loan according to the mortgage refinance lender’s requirements.
FHA loans require a minimum credit score of 580, but some lenders have a higher minimum credit score requirement. In addition, your debt-to-income ratio (DTI), which compares the minimum monthly payment on all recurring debt to your gross monthly income, should be 43% or less. However, some FHA loan refinance options may be more lenient.
Depending on your FHA refinance program, you may also need to pay closing costs, typically 2% to 6% of the loan amount. FHA loans require mortgage insurance, which will be part of your monthly payment.
4 types of FHA refinance loans
1. FHA Streamline Refinance
Best for: Borrowers who already have an FHA loan and want to skip the appraisal, credit check, or income verification processes.
An FHA Streamline Refinance is available to current FHA borrowers who want to refinance into another FHA home loan. Homeowners must have made at least six months of on-time payments, cannot be delinquent on their mortgage, and be able to demonstrate a tangible benefit to refinancing, such as a lower monthly payment.
Your payment may be lower if you lock in a lower interest rate or if you have paid down your loan and the balance is significantly reduced from the initial mortgage.
The FHA Streamline Refinance option means you don’t need an appraisal, and you may not need to undergo a credit check or income verification. However, you must pay closing costs up-front rather than wrap them into the loan balance. FHA closing costs are typically 2% to 6% of the loan amount.
FHA Streamline Refinance requirements
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Existing FHA mortgage
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Must have made at least six months of timely payments
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Credit score must typically be 580+ (minimum scores may vary by FHA lender)
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Must derive a “net tangible benefit” by refinancing
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Reduce your mortgage payment by 5% or more (including principal, interest, and FHA mortgage insurance premium) OR
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Switch from an adjustable-rate mortgage to a fixed-rate one with an interest rate no more than 2% above your existing ARM rate OR
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Switch from a fixed-rate mortgage to a one-year ARM with a rate at least 2% lower than your current rate OR
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Exchange your current ARM for a new ARM that lowers your monthly payment by at least 5%
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Cannot finance closing costs
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Mortgage insurance premiums required
2. FHA Simple Refinance
Best for: Existing FHA borrowers who want to avoid paying up-front closing costs
As with an FHA Streamline Refinance, an FHA Simple Refinance is available to FHA borrowers who want to refinance into another FHA mortgage. You must have made at least six on-time monthly mortgage payments and meet minimum FHA credit score requirements.
The FHA Simple Refinance does require a home appraisal to assess your property value. Unlike the FHA Streamline Refinance program, you can wrap your closing costs into the new loan balance as long as the loan doesn’t exceed 97.75% of the home's value.
FHA Simple Refinance requirements
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Current FHA loan
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Home must be primary residence
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On-time payments for at least six consecutive months
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Credit score must typically be 580+ (minimum scores may vary by lender)
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Requires an appraisal
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Mortgage insurance premiums required
3. FHA cash-out refinance
Best for: Borrowers who have at least 20% equity in their home and want to use cash for other purposes
If your home has increased in value since you bought it, you have paid down the loan balance, or both, you may be eligible for an FHA cash-out refinance. Unlike the Simple or Streamline Refinance, you can take cash from your home equity. However, your loan cannot exceed 80% of your home value.
For example, if your home is appraised at $400,000, you can borrow up to $320,000. If your current loan balance is $240,000, you’d still have $80,000 left over in cash after using the loan to pay off your $240,000 principal ($240,000 + $80,000 = $320,000). If you want to wrap your closing costs into the loan, you’ll take out less cash.
FHA cash-out refinance requirements
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Current FHA loan
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Home must be primary residence
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Must have made at least six months of on-time mortgage payments — if you’ve had the loan for longer, you need a minimum of 12 consecutive months of on-time payments
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Need to have lived in the house for at least 12 months
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Credit score must typically be 580+ (minimum scores may vary by the cash-out refi lender)
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Must retain at least 20% home equity after refinancing
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Requires an appraisal
4. FHA 203(k) loan refinance
Best for: Borrowers with an FHA or conventional loan looking to renovate their home
If your goal is to renovate your home, you may want to consider refinancing your FHA loan or conventional loan into an FHA 203(k) loan, which wraps home improvement expenses into your new loan balance. Depending on how much work needs to be done and whether the work is structural or not, you can apply for a limited or standard FHA 203(k) refinance.
Specific rules govern the types of projects that can be financed with an FHA 203(k) refinance. The standard FHA 203(k) loan requires an FHA consultant to help manage it. Both types of rehabilitation loans require minimum credit scores set by the lender and an appraisal of the home's current market value and the estimated value after the improvements are completed.
FHA 203(k) loan requirements
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Standard FHA 203(k) refinance: Minimum repair cost of $5,000 but no maximum and can include structural repairs and/or improvements
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Limited FHA 203(k) refinance: Maximum of $75,000 in non-structural repairs and renovations
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Home must be at least one year old
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Credit score of 500+, though lender requirements may vary
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Homes must meet FHA requirements
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Total loan amounts must fall within FHA lending limits for the area
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Mortgage insurance premiums required
Cost to refinance an FHA loan
Refinancing an FHA loan requires closing costs that range from 2% to 6% of the loan amount. Depending on the FHA refinance program, you may be able to wrap those closing costs into your new loan balance.
FHA loans require mortgage insurance, including an up-front mortgage insurance payment of 1.75% of the loan amount at closing and ongoing mortgage insurance premium (MIP) payments. If you have had your original FHA home loan for three years or less, you may qualify for a partial refund on the up-front mortgage insurance on your new refinanced mortgage.
Dig deeper: How to remove FHA mortgage insurance
FHA loan refinancing FAQs
Can an FHA loan be refinanced?
Yes, you can refinance an existing FHA loan using an FHA refinance loan like the Simple, Streamline, or cash-out refinance. You can also refinance an FHA loan into a conventional mortgage.
How much equity do you need to refinance an FHA loan?
You’ll need at least 20% equity in your home to refinance an FHA loan using an FHA cash-out refinance. You will likely need significantly more, as the FHA requires you to keep at least 20% equity in your home after refinancing. There is no minimum equity requirement for FHA loan products like the Streamline and Simple Refinance since these loans don’t allow for cash-out options.
What credit score is needed for an FHA refinance?
For an FHA refinance, you’ll typically need a credit score between 500 and 580. The type of FHA refinance loan and the lender will determine the minimum score. For example, some FHA Streamline Refinance loans don’t require a credit check at all, while other loans may require a credit score of at least 580 for the best approval odds.
This article was edited by Laura Grace Tarpley.
