FHA Loan Refinances: Requirements, Pros And Cons

If you’re in the market for a home refinance, you might come across a variety of FHA loan refinance options during your research. But what exactly are these options and how do they differ from conventional mortgage refinances?

Whether you began with an FHA loan or you’re looking to refinance into one, there are options available for you. Let’s go over the pros and cons of different FHA loan refinance options.

What Is An FHA Loan?

An FHA loan is a mortgage loan backed by the Federal Housing Administration (FHA). Government-backed mortgages like FHA loans offer some advantages when compared with conventional loans.

These loans are often easier to obtain for borrowers with higher debt-to-income ratios (DTIs) and lower credit scores because of less stringent qualification requirements. FHA mortgages can also have more lenient down payment requirements than other loan types.

See What You Qualify For

How Does An FHA Refinance Work?

Before we break down the specific refinance options available for FHA loans, it’s important to briefly touch on how a mortgage refinance works. When you refinance your mortgage, you’re essentially swapping out your existing home loan for a new one, often taking on new loan terms.

So, if you’re a homeowner looking to lower your interest rate or monthly payment, change your loan type and terms, or tap into your home equity, you may find yourself considering a refinance.

FHA Loan Refinance Options

Below, we go over four different types of FHA loan refinances. If the benefits of an FHA loan appeal to you, consider whether you qualify for the following FHA refinance options:

1. FHA Simple Refinance

An FHA Simple Refinance is a viable option for homeowners who originally purchased their home with an FHA loan. As the name implies, this straightforward refinance option offers homeowners the opportunity to lower their interest rate or their monthly mortgage payment.

The FHA Simple Refinance can also allow homeowners to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan, if preferred.

Refinance Requirements

Qualifying for an FHA Simple Refinance means meeting certain requirements, including credit score requirements and certain income limits. Typically, a credit score of 580 is necessary to qualify for an FHA Simple Refinance.

Payment history is also considered. For you to be eligible, all your loan payments from the last 6 months must be up to date. A home appraisal will be completed to determine whether your home’s value has changed.

Pros Of An FHA Simple Refinance

Opportunity to finance closing costs: By lumping your closing costs into the overall loan amount, the upfront costs of refinancing are lower.

Cons Of An FHA Simple Refinance

Borrowers can’t take money out: The FHA Simple Refinance option does not come with a cash-out feature, so if you’re looking to tap into home equity, this isn’t the best option.

2. FHA Streamline Refinance

Much like the Simple Refinance option, the FHA Streamline Refinance is available to homeowners with existing FHA loans who are looking to lower their interest rate and monthly payment.

But unlike the Simple Refinance option, the Streamline Refinance may not require an appraisal or an in-depth credit report, allowing the process to move more quickly.

Refinance Requirements

To qualify for an FHA Streamline Refinance, you’ll need to have an existing FHA loan with no outstanding monthly mortgage payments. You must not be within 210 days of the closing date of your original home loan. Specifically, you’ll have to meet these conditions for your mortgage payments:

No payments more than 30 days late in the last 6 months

FHA Streamline Refinances also have a requirement surrounding net tangible benefit, which refers to the financial advantage gained by the borrower with a refinance. This means that for the FHA to approve the refinance, it needs to be quantifiably beneficial to you as the borrower.

For example, if you’re reducing the length of your loan term, the new interest rate can’t be higher than the rate on the current mortgage. The new monthly mortgage payment also can’t exceed the old payment by more than $50 per month.

Pros Of An FHA Streamline Refinance

Less strict mortgage lender requirements: Because the refinance is “streamlined,” this process requires fewer in-depth credit and income checks. In general, your lender may assume that if you’re able to pay your current monthly payment, you’ll probably be able to pay the new one.

Cons Of An FHA Streamline Refinance

Closing costs must be paid upfront: Unlike a Simple Refinance where you can lump these straight into the loan, an FHA Streamline Refinance requires the borrower to pay closing costs upfront, which are typically 2% – 6% of the loan amount.