Refinance FHA Loan: Requirements & Benefits

Refinancing your FHA loan can come with many benefits. For one, it could help you lower your interest rate or monthly payment. Refinancing can also allow you to get rid of your mortgage insurance premiums (MIP) and save even more cash in the long run.

Can you refinance an FHA loan?

Yes, you can refinance your FHA loan. Two of the most common options include:

1. Refinancing into a conventional loan
2. Applying for an FHA streamline refinance

How to refinance an FHA loan

Refinancing an FHA loan into a conventional loan can save you money by lowering your interest rate and eliminating the monthly mortgage insurance premiums attached to your current FHA loan. However, this means you’ll need to qualify for a new, conventional home loan and meet the minimum requirements set by the lender, which tend to be stricter.

For example: If you don’t have at least 20% equity in your home, you’ll have to continue making mortgage insurance payments on your conventional loan until you reach that amount.

If you use an FHA streamline refinance — a common FHA-to-FHA refinance option — you won’t need to go through credit or income verification or pay for a new home appraisal. The lack of requirements and paperwork makes this a simpler and speedier process.

An FHA streamline isn’t your only option if you’re seeking an FHA-to-FHA refinance. You can opt for an FHA simple refinance if you don’t qualify for a streamline refinance. However, a simple refinance will require a new home appraisal.

Tip: If you want to tap equity from your home, cash-out refinancing is also an option. With this loan, you borrow enough money to replace your current FHA loan and withdraw, or “cash out,” some of your equity.

To qualify for an FHA cash-out refinance, you’ll need to have owned your home and used it as your primary residence for at least a year prior to applying for the refinance (one exception being if you inherited the property). You can borrow a total of 80% of your home’s appraised value, and the existing loan must be repaid in full from the cash-out loan proceeds.

Check out: 10 Best FHA Streamline Refinance Lenders

FHA refinance vs. conventional

Both FHA and conventional mortgage refinances come with their own benefits and eligibility requirements. Generally, refinancing a conventional loan will come with stricter credit score, equity, and documentation standards, but it also holds potentially more benefits for the right homeowner.

Refinancing to a conventional loan

The biggest perk to choosing a conventional refinance over an FHA one is that you can avoid mortgage insurance entirely. FHA loans come with mortgage insurance premiums anywhere from 11 years to the entire loan term. With conventional loans, there’s no insurance required — as long as you own at least 20% of the home.

Requirements

Conventional loans have stricter requirements than FHA ones. Here’s what those look like:

• A credit score of at least 620: This shows the lender you’re financially responsible and pay your bills on time.
• At least 20% equity: If you want to avoid private mortgage insurance charges, you’ll need at least 20% equity in your home. The lender may order an appraisal to confirm this.
• The ability to pay to refinance closing costs: Closing costs typically run anywhere from 2% to 5% on refinance loans. Your lender will want to verify you have the cash to cover these.
• Documents to prove your creditworthiness, including: Tax returns, pay stubs, a credit report (the lender will order this), and W-2s

Pros

There are plenty of advantages to refinancing into a conventional loan. Here are just a few:

• You can substantially lower your interest rate. Since conventional loans require a higher credit score, there’s a chance you can get an even better interest rate. This means savings on your monthly mortgage payment and over the life of the loan.
• You can get rid of FHA mortgage insurance. As long as you have enough equity, you can take out your new conventional loan with no mortgage insurance at all (upfront or monthly).
• You can take cash out of your home. If you need cash to cover home improvements or any other expense you might have coming, a conventional refinance allows you to do this.

Cons

There are drawbacks to conventional refinance, though. These include:

• They have more stringent requirements: These loans are harder to qualify for than FHA loans, so you’ll need to have a good handle on your finances before applying.
• You may need to pay for private mortgage insurance: If you don’t have at least 20% equity in your home, PMI is generally required.

FHA streamline refinancing

The FHA streamline refinancing program is designed for FHA borrowers who are interested in refinancing into another FHA loan. It allows them to do so without an additional credit or employment check.

Requirements

The biggest requirement for an FHA streamline refinance is that you have an existing FHA loan.

Other than that, you’ll need to have:

• No outstanding mortgage payments: You must be current on your payments as of your application date.
• Six months of on-time payments: You need an established history of on-time payments to qualify.

Pros

FHA streamline refinances have few documentation requirements and can be processed quickly. Additional benefits include:

• Lowering your interest rate: Because these loans come with the insurance of the Federal Housing Administration, lenders can offer lower interest rates.
• Fewer requirements: You won’t need to produce a ton of documents or even have a credit check done. Because of this, the process is generally much faster.
• Easily switch your loan type: If you have an adjustable-rate loan, you can easily switch to a fixed-rate one.

Cons

FHA streamlines aren’t perfect, though. There are quite a few drawbacks, including:

• FHA mortgage insurance premium: MIP is required on all FHA loans, both upfront and with your monthly payments.
• No cash out: The FHA streamline program does not allow borrowers to take cash out when refinancing.

FHA cash-out refinance

An FHA cash-out refinance lets you withdraw equity from your home when you refinance your FHA loan. You can use the cash however you want.

Requirements

The FHA has established guidelines for cash-out refinance loans. Some of the requirements you’ll have to meet include:

• Owned and occupied the home for 12 months: The home must have been your primary home for the previous 12 months.
• Timely mortgage payments: Borrowers must have made 12 months’ worth of mortgage payments in the month they were due. The exception is a mortgage you’ve had for fewer than 12 months.
• Appraisal: The lender will order an appraisal to verify the home’s value.

Pros

An FHA cash-out refinance loan is a great choice for some borrowers. Here’s why:

• Low credit score requirements: You can qualify with a credit score as low as 500, although lenders typically want it to be higher for an FHA cash-out refinance.
• Withdraw equity: Borrow up to 80% of your home’s value.
• Switch loan types: An FHA cash-out refinance can replace a conventional or FHA loan.

Cons

FHA cash-out refinances come with some drawbacks too:

• Mortgage insurance premiums: The FHA charges a 1.75% upfront mortgage insurance premium and a 0.85% annual premium for all FHA loans.
• No jumbo loans: The conforming limit for most FHA cash-out refinance loans is currently $420,680.
• For owner-occupied homes only: The FHA doesn’t allow cash-out refinance loans for second homes or investment properties.

Benefits of refinancing

Refinancing an FHA mortgage loan has a number of benefits for the right homeowner. For example, a refi could help you:

• Get a lower interest rate.
• Extend your loan term to reduce your payments.
• Eliminate mortgage insurance premiums by financing into a conventional loan.
• Cover a renovation or other big expense by cashing out equity.

Should you refinance your FHA loan?

If you can lower your interest rate by at least 0.75%, then refinancing your mortgage is likely a smart move. To determine if an FHA streamline or conventional refinance is best for you, use the below table: