You already own a home, so you’re probably somewhat familiar with the mortgage process. If you’ve never refinanced through FHA you might think that it’s more complicated because you’re involved with a government agency. Well, you’ll be pleasantly surprised to learn that the FHA refinance application process isn’t much different than any other mortgage type. Of course, borrowers will have more protections and it’s easier to get qualified with FHA.<
It doesn’t matter if your current mortgage is Conventional, FHA, USDA VA, several good refinance options are offered through FHA that work when other programs don’t. And FHA refinance loans can be used to lower your monthly payments, get cash out of your home, consolidate debt, obtain a fixed-rate mortgage, or even avoid foreclosure. Compare your options below — it’s easy!
What refinance programs does FHA offer?
Three FHA refinance programs are presently offered:
1. FHA Cash-Out Refinance
FHA cash-out refinance is a great way to gain access to the equity you’ve built in your home. Cash-out refi’s mostly adhere to general FHA requirements except for the following rules:
- You can access your home equity for cash, up to 85 percent of the property’s appraised value (85% LTV).
- Cash-out funds can be used for any purpose, including refinance of first and second mortgages plus home improvements, debt consolidation or anything else.
- If you’ve owned the property more than 12 months, the refinance loan amount is limited to 85% of the current appraised value.
- If you’ve held the property less than 12 months, the refinance loan amount is limited 85% of the original sales price or the current appraised value, whichever is least.
- Homeowners who have held their property less than 6 months are ineligible for a cash-out refinance.
A FHA cash-out refinance is only offered for owner-occupied primary residences with at least six months of history on the existing mortgage. If there is a co-borrower, that person must also occupy the property. Also, for the past 12 months all your mortgage payments must have been made during the month due.
The maximum loan-to-value ratio (LTV) amount for an FHA cash-out refinance has been 85 percent since April of 2009.
2. FHA Rate-Term Refinance
FHA rate-term refinance is often the best (and only) option for homeowners to lower their interest rate.
The reason? FHA rate-term refinance allows a loan-to-value ratio up to 97.75% of the property value, whereas conventional refinance programs generally allow only an 80% loan-to-value ratio.
FHA’s rate-term refi program mostly adheres to the same credit, income and property qualifications as other requirements for FHA loans, with the following exceptions:
- You can refinance their current home loan up to 97.75% percent of the property’s appraised value (97.75% LTV).
- FHA rate-term refinance is used to lower interest costs on housing debt including first mortgage, second mortgage and HELOC.
- Any closing costs and discount points are usually rolled into the new loan, borrowers may not receive more than $500 cash back at closing.
- If property has been held less than 12 months, new loan amount is limited to 97.75% of previous sales price.
Accounts allowed to be refinanced include first mortgages, second mortgages, home equity loans and home equity lines of credit (HELOC’s). If you want to refinance your HELOC in with the loan, be sure not to withdraw more than $1,000 dollars for at least 12 months before applying. Rate-term refinances also help borrowers with an adjustable-rate mortgage get into a stable fixed-rate.
3. FHA Streamline Refinance
Streamline Refinance is offered for borrowers who already have an FHA mortgage and want a lower rate quickly. FHA recognizes that it benefits all parties for current FHA mortgage holders to take advantage of lower rates. That’s why the Streamline Refinance program is designed to be easy and uncomplicated, and can often be completed without a credit check, income verification or property appraisal.
FHA Streamline Refinance features include:
- There’s no maximum LTV requirement for the property (Streamline Refinance without appraisal).
- Often there’s no credit check requirement for the borrower.
- Often there’s no income verification or verification of employment.
- The homeowner’s current FHA loan must be at least 6 months old.
- The homeowner’s mortgage payments must be on time for the three months prior to application.
- Homeowner’s can’t have more than one late payment during the previous 12 months.
- The Streamline Refinance loan must result in a net tangible benefit of a 5% drop in the monthly payment amount, or be a transfer from adjustable to fixed-rate mortgage.
How much can I refinance?
The maximum FHA Refinance Loan amount is determined by:
- Maximum Loan Amount: The maximum amount allowed for FHA Refinance loans varies from county to county. The highest FHA Refinance amount right now is $729,750. The lowest maximum amount available in any county is $271,050. You can view maximum limits for your area here.
- Maximum Financing: The maximum FHA financing for an FHA Rate/Term Refinance (No Cash-Out) or Streamline Refinance (with appraisal) is 97.75% of the appraised value of the home or its selling price, whichever is lower. The maximum financing for an Cash-Out Refinance is 85%.
FHA Refinance Loan FAQ’s
What factors determine if I’m eligible for FHA Refinance?
To be eligible for an FHA Refinance Loan, your monthly housing costs (with mortgage principal and interest, property taxes, and insurance) must be less than a specified percentage of your gross monthly income (31% debt-to-income ratio).
You must also have enough income to pay your housing costs plus all additional monthly debt (43% debt-to-income ratio). These ratios can be exceeded somewhat with compensating factors.
Your credit background will be scrutinized.
At least a 580 FICO credit score is required to obtain an FHA approval.
Can I get an FHA refinance loan after bankruptcy?
If you’ve been discharged from a Chapter 7 bankruptcy for two years or more, you are eligible to apply for an FHA refinance loan. If you’re in Chapter 13 bankruptcy and made all court approved payments on time for a year, you’re also eligible.
Are there any out of pocket expenses for an FHA Refinance Loan?
Generally, there are no out-of-pocket expenses incurred with an FHA home refinance, other than the appraisal fee. FHA Refinance allows all closing costs to be included in the loan, provided that the home value is enough.
Can I take cash out of my home with an FHA Refinance?
Yes. You can get more than the amount owed on your current mortgage with an Cash-Out Refinance. That means you can pays off the current mortgage and get additional cash to use however you want. They maximum loan amount for a Cash-Out loan is 85% of the property’s current appraised value.
What are the guidelines for an FHA Refinance Loan?
If the borrower wishes to take cash out of the property, then the maximum loan amount is 85% of the current appraised value. If the refinance isn’t cash-out, the maximum financing is 97.75% of the appraised value or the loan amount plus closing costs, whichever is lower.
Why should I consider refinancing into a FHA-insured mortgage?
FHA Refinance mortgages don’t come with prepayment penalties, teaser rates or balloon payments. They are offered at market rate with terms up to 30 years and are fully amortized, meaning that you pay towards principal and interest every month.
What if I have a prepayment penalty and other refinancing costs and there isn’t enough equity in my home to refinance?
If you don’t have sufficient equity in your home to include our prepayment penalty or other costs, you may ask your lender to consider a second mortgage to pay the difference. Offering either of these options is at the discretion of the lender.
Does it matter that the value of my home is now less than what I still owe?
Yes it does, and there are a few remedies available. Your current lender could consider accepting a short payoff, or to hold a second mortgage to make up the difference. Alternatively, you could pay the difference at closing in cash, provided it’s available.