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Can you refinance an FHA loan?  |  Mortgages and advice

If you have an FHA loan — a mortgage backed by the Federal Housing Administration — you may want to refinance to lower your monthly home payment or to meet other financial goals. Banks and other FHA-approved financial institutions provide these loans, which offer two key benefits that appeal to many buyers:

  • Down payments as low as 3.5%.
  • Credit score requirements more lenient than most conventional loans.

But FHA loans can be more expensive than conventional loans for some borrowers. Before you start looking for a lender, make sure you understand your FHA refinance options and their requirements.

Can you refinance an FHA loan?

Yes, you can refinance your FHA loan and you can choose from many different FHA refinance options. The key is to select the type of loan that suits you best and to check that you meet the conditions.

How to Refinance an FHA Loan

FHA Refinance Options

FHA streamlines refinances are designed to lower your interest rate and monthly payments and get you up to $500 in cash back. If you need more money, you will need to consider another type of refinance.

The refinancing process is meant to be quick and easy by limiting paperwork and generally eliminating the home appraisal. Borrowers can choose between credit-eligible or non-credit-eligible refinances, but both require credit checks. Your lender may not verify your income for a credit-ineligible refinance, which could speed up approval.

Keep in mind that an FHA streamlined refinance will require you to pay closing costs, and these cannot be included in the new loan. A streamlined FHA refinance also does not remove mortgage insurance from your loan.

Simple FHA Refinances allow homeowners to exchange their FHA loans for new FHA loans with fixed or adjustable interest rates. This refinance does not have a cash-out option.

FHA 203(k) refinances, also called rehabilitation loans, consolidate renovation and repair costs into one mortgage. Borrowers can refinance into a limited or standard FHA 203(k) loan. The difference is that the limited 203(k) loan is for renovations under $35,000 and does not pay for major structural repairs.

The standard loan covers larger jobs, such as additions or full home renovations, and it typically covers jobs that cost more than $35,000. The minimum standard loan amount is $5,000.

Conventional refinancing come from private lenders and are not backed by government agencies. Refinancing an FHA loan to a conventional loan can get you rid of mortgage insurance, as long as you have at least 20% of the equity in the home and can qualify.

What are the pros and cons of refinancing an FHA loan?

Benefits

Get rid of mortgage insurance. All FHA loans come with mortgage insurance. By refinancing an FHA loan into a conventional refinance loan, you can get rid of mortgage insurance – as long as you have at least 20% of the equity in your home.

Reduce your monthly payment. You could save if you lower your mortgage insurance premiums, get a lower interest rate, or finance a smaller principal balance since you closed on your home.

Avoid forbearance. Lower payments can help struggling homeowners considering forbearance, which temporarily suspends or reduces mortgage payments.

“Sometimes it is more beneficial for a family to refinance than to abstain,” says Noerena Limón, senior vice president of public policy and industry relations at the National Association of Hispanic Real Estate Professionals. “As long as the monthly payment is reduced, it can help them stay on the property.”

Save on interest charges. A lower interest rate could help you save not only on your mortgage payment, but also on long-term interest. Let’s say you refinance a $200,000 30-year loan with a fixed interest rate of 4% into a new 30-year loan with a fixed rate of 3%. Your monthly payment drops by approximately $112, which is over $40,000 in interest savings over the life of the loan.

Switch to another type of loan. You can easily refinance from an adjustable rate mortgage to a fixed rate loan, or vice versa with an FHA Simplified Refinance.

The inconvenients

You must pay closing costs. Each time you refinance, you must pay the closing costs of the new home loan. Unless you’re sure you’ll be staying in the house for a while, those closing costs can negate any savings you’ll realize from refinancing.

Your payment could go up. You can pay off your mortgage faster and save on overall interest if you refinance for a shorter term: say, from a 30-year loan to a 15-year loan. But that’s only a good idea if you have extra money to spare for a bigger payment and not a lot of debt.

You could reduce the equity in your home. That’s if you choose a cash refinance, which converts some of your home’s equity into dollars that you can use for any purpose. Additionally, the rates for cash refinances are often higher than for other types of refinances.

How can you qualify for an FHA refinance loan?

Eligibility requirements for FHA refinance loans vary depending on the program you choose.

FHA streamlines refinancing: If you have had an FHA loan for at least 210 days and have made mortgage payments on time for the past six months, then you may qualify for an FHA streamlined refinance. These are available for primary residences, second residences approved by the U.S. Department of Housing and Urban Development, or non-owner occupied properties.

A streamlined refinance makes sense for those who want to lower their interest rate on their current FHA loan.

“Perhaps their credit score at the time of the initial FHA loan was low, which caused the existing loan to have a relatively higher rate at the time,” says Karen Solgard, loan consultant at New American Funding. .

Be careful when cashing in your capital, says Limón. Make sure you know clearly how the money will be used. “Once you take money out of an asset, it devalues ​​your asset,” she says, suggesting owners only use the money for emergencies or as a way to grow their wealth. .

Simple FHA Refinance: The home you are refinancing must be your primary residence or a HUD-approved secondary residence to qualify. The lender will order an appraisal and verify that you have made payments on time for the past six months.

FHA 203(k) Refinance: This type of loan allows you to refinance and rehabilitate a house that is over a year old. Only certain types of projects are eligible and they cannot take longer than six months.

Does refinancing an FHA loan make sense to you?

Ask yourself these questions to decide if refinancing is right for you:

What are my financial goals? Think about what you would like to accomplish with a refinance. Some people hope to lower their monthly mortgage costs. Others simply want to pay a lower mortgage interest rate or hope to use the equity in their property to free up some cash.

Know what you are aiming for with a new home loan and look for the refinancing program that would best suit your needs.

Will I qualify for a refinance loan? Lenders can check your credit score, debt ratio and employment status. Many have adopted stricter standards during the pandemic and favor borrowers with higher credit scores and lower debt ratios.

Right now, “all borrowers, not just FHA borrowers, will need better credit and lower debt than before the pandemic,” Solgard says. “Lenders are looking at forbearance requests and possible foreclosures.”

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