A Complete Guide to FHA Refinances: Eligibility, Requirements, and More

The Federal Housing Administration (FHA) offers a variety of refinance options aimed at improving housing affordability and helping property owners access the equity in their homes. We'll cover the different types of FHA refinances available and the eligibility requirements you can expect to encounter when refinancing into a new FHA-backed loan.

Key Takeaways

• Qualifying for an FHA refinance can be easier than other types of mortgages because of the program’s relaxed requirements.

• The streamline FHA refinance is a low-document loan that doesn’t require an appraisal or in-depth credit check in most scenarios.

• A simple FHA refinance can make refinancing more affordable by allowing you to roll closing costs into your loan.

• You can borrow up to 80% of your home's value with a cash-out FHA refinance, receiving some of your equity as a lump sum of cash.

• The 203(k) renovation loan uses your home’s future “as completed” value to let you finance major repairs and improvements.

Can You Refinance an FHA Loan?

Yes, you can refinance an FHA loan. In fact, for some borrowers, the process may even be simpler than refinancing other types of mortgages.

When you refinance, you're applying for a brand new loan to replace your existing mortgage. In most cases, you will need to requalify and go through full FHA underwriting, much like when you took out your current loan.

This means undergoing a detailed credit check, providing tax returns and other income documentation, and ordering a new appraisal of your home. However, borrowers just wanting to reduce their interest rate and lower their monthly payments may qualify for a streamline FHA refinance and be able to skip most of this process.

FHA Refinance Requirements

Here's what you can expect:

FHA Streamline exception: No income or appraisal is required. Therefore, there is no debt-to-income or loan-to-value limit. A streamline refi is typically available for current FHA loan holders taking no cash out.

• Credit Score and LTV: You can refinance up to 97.75% of your home’s value with a credit score of 580. Borrowers with at least 10% equity in their property may be able to do an FHA refinance with a score as low as 500. Cash-out refinances have a maximum loan-to-value of 80%.

• Debt-to-Income Ratio: You'll generally need a debt-to-income (DTI) ratio of 50% or less. Some FHA lenders may prefer a DTI below 43%, while others could approve borrowers with a DTI approaching 57% if they have substantial equity or other mitigating factors.

• Primary Residence: You must still be living in the home as your primary residence, with the exception of the streamline refinance, which allows for non-owner occupied properties.

• FHA Loan Limits: Your new loan must be within FHA loan limits. This will generally only be an issue for existing FHA borrowers with certain cash-out refinances or when rolling other loans in with your FHA refi. FHA loan limits for 2024 are $498,257 for single-family homes in most parts of the country. High-cost areas may have limits up to $1,149,825.

Different Types of FHA Refinances

You'll find a number of refinance options available through the FHA, each suited to the needs of different types of borrowers. Some are limited to current FHA loan holders, while others can be obtained by any qualifying homeowner.

Streamline FHA Refinance: a low-doc refi that doesn’t require an appraisal and won’t need you to reverify your income in most cases.

Simple FHA Refinance: a more typical refinance for borrowers who don't qualify for a streamline or want to roll closing costs into their loan.

Cash-Out FHA Refinance: an option for withdrawing a portion of your home's equity as a lump sum of cash to spend however you choose.

203(k) FHA Refinance: a renovation loan that allows you to borrow against your home’s future value to make home improvements and repairs.

Streamline FHA Refinance

The streamline FHA refinance is a low-doc refi option only available to current FHA loan holders. With a streamline refinance, you won't have to get an appraisal or supply income or employment documentation.

A streamline refi can be one of the fastest and simplest ways to reduce your interest rate and lower your monthly payments. You cannot, however, receive cash back at closing. You also cannot wrap your closing costs into your loan, although some lenders may offer “no closing cost” refinances in which they cover your costs in exchange for giving you a higher rate.

You may be able to use a streamline FHA refinance to remove a co-borrower from your loan. However, you will need to complete a credit check and verify your income to prove you can still afford the payments. You can also do a streamline refinance on non-owner occupied properties, although options are limited to fixed-rate mortgages.

To qualify for an FHA streamline refinance, you must have had your current mortgage for a minimum of 210 days, made six monthly payments or more, and waited at least six months from the first payment due date.

In addition, all six of your most recent payments must have been made on time, with no more than one 30-day late payment during the prior six months.

Net Tangible Benefit Requirement

Streamline FHA refinances must pass the net tangible benefit requirement to be approved. This helps ensure that homeowners are saving with their refinance and not falling victim to predatory lending.

Most borrowers will need to see their combined interest rate and mortgage insurance premium drop by at least 0.5% to be eligible. In some scenarios, you may face other net tangible benefit requirements, such as when shortening your loan term or switching between fixed and adjustable rate mortgages.

Pros of a Streamline FHA Refinance

• Skipping the home appraisal can save you hundreds of dollars in closing costs.

• Low-doc loans are much simpler and can close faster than other refinances.

• If home values have dropped and you owe more than your home is worth, you can still qualify for a streamline refi.

Cons of a Streamline FHA Refinance

• All streamline loans must pass the net tangible benefit test to be approved.

• You can’t roll closing costs into a streamline FHA refinance.

• You cannot wrap in second mortgages or other loans with the streamline refi.

Simple FHA Refinance

The simple FHA refinance is another option for existing loan holders to reduce their interest rate and alter their loan terms. Unlike the streamline refi, the simple refinance will require you to go through a detailed credit check and obtain a home appraisal.

However, the simple FHA refinance will allow you to roll your closing costs – including the upfront mortgage insurance premium – into your new loan as long as you have sufficient equity. Homeowners may also opt for the simple FHA refinance when they do not pass the net tangible benefit requirement for a streamlined refi.

Obtaining a simple FHA refinance requires that all mortgage payments within the past six months be made on time and that there’s no more than one 30-day late payment within the preceding six months.

Pros of a Simple FHA Refinance

• As a current FHA loan holder, the simple refinance process will likely be easier than refinancing through another program.

• You can roll closing costs into your mortgage up to 97.75% of your home’s current appraised value.

• The simple refinance won’t require you to meet the net tangible benefit requirement like streamline refinances.

Cons of a Simple FHA Refinance

• Refinancing will likely take longer and require more documentation than a streamline loan.

• Borrowers who have run into credit issues or taken on added debt may have trouble qualifying.

• You will need to pay for a new home appraisal with a simple refinance.

Cash-Out FHA Refinance

A cash-out refi lets you adjust your interest rate and mortgage terms while also cashing out a portion of your built-up equity. The cash-out FHA refinance option is open to all homeowners regardless of their current mortgage type.

FHA lenders will let you do a cash-out refinance for up to 80% of your property’s current value. For example, if you have a $150,000 loan on your $300,000 home, you could withdraw up to $90,000 in equity – minus closing costs – for a total cash-out FHA refinance of $240,000.

In most cases, you will need to have lived in your home for a minimum of 12 months and had no late mortgage payments within the past year.

Pros of a Cash-Out FHA Refinance

• FHA refinance requirements are lower than those of other cash-out refinance programs.

• You can use the funds for anything, although cash-out refinances are often used for home repairs and improvements.

• Homeowners with other types of loans can still qualify for a cash-out FHA refinance.

Cons of a Cash-Out FHA Refinance

• You will be required to pay for mortgage insurance, even with 20% remaining equity.

• Adding to your loan balance will likely increase your monthly payments.

• Interest rates are generally higher for cash-outs than other types of FHA refinances.

203(k) FHA Refinance

The FHA 203(k) refinance is a type of renovation refinance loan available to all property owners that allows you to borrow against your home's anticipated value to fund major renovations and home improvement projects.

While a cash-out refinance is based on your property's current appraised value, the 203(k) FHA refinance uses the amount your home will be worth once you complete your proposed renovations.

For example, if your home is currently worth $250,000 but you plan to add a bedroom that will bring its value to $300,000, you can borrow against the larger amount. Also, while cash-out refis are limited to 80% of the appraised value, the 203(k) FHA refinance is available for up to 97.75%.

The downside with this type of loan is that you aren't given a lump sum of cash at closing. Instead, your lender handles the disbursements of funds to contractors and suppliers throughout the improvements. There's more oversight than with a cash-out refinance, but the borrowing potential is also far greater.

For homeowners planning minor improvements and non-structural repairs, the Limited 203(k) FHA refinance lets you fund as much as $75,000 in renovations (as of November 2024) with less red tape than the Standard 203(k) loan.

Pros of a 203(k) FHA Refinance

• 203(k) FHA refinance rates are lower than most other options for funding home repairs.

• The majority of homeowners can borrow more for improvements than with a cash-out refinance.

• Properties with significant issues that may not qualify for other FHA refis may be eligible for a 203(k) refinance.

Cons of a 203(k) FHA Refinance

• The FHA restricts some luxury improvements, such as adding a new swimming pool or outdoor fireplace.

• There are more hoops to jump through since your lender is involved at every step of the process.

• Increasing your current loan balance will likely lead to higher monthly payments.

FHA Refinance Alternatives

FHA loans can be easier to get approved for than other types of mortgages. This makes an FHA refi the ideal option for borrowers with bad credit or higher levels of debt. However, you can refinance FHA loan products into other programs, meaning that qualified applicants have additional refi options to consider.

Conventional Refinances

Conventional loans are not insured by a government agency and, as such, have slightly higher requirements than FHA refis. You can expect to need a minimum credit score of 620 and a maximum debt-to-income ratio of 45%. You'll also need at least 5% equity in most cases.

However, conventional refinances don't have an upfront mortgage insurance premium like FHA loans, and borrowers with at least 20% equity won't need to worry about mortgage insurance at all. With good credit and healthy finances, you'll likely find lower monthly payments by going conventional.

VA Refinances

If you or a co-borrower qualify for a certificate of eligibility from the US Department of Veterans Affairs, you may be able to reduce your costs by refinancing into a VA loan.

VA interest rates are typically lower than the FHA's, and there are no mortgage insurance requirements. However, refinancing into the VA program requires a cash-out refinance with a funding fee ranging from 2.15% to 3.3% for most borrowers.

Home Equity Lines of Credit (HELOCs)

With a home equity line of credit (HELOC), you can borrow against your home's equity without refinancing your primary mortgage. Instead, you're provided with a line of credit that you can tap into, repay, and repeat the process with as many times as you'd like during the initial five to ten-year draw phase.

HELOC rates may be higher than a standard loan, although you only owe on the amount you borrow. You also won't have to pay the closing costs associated with a typical refinance. Plus, HELOCs have no UFMIP, which could save you 1.75% of your balance right off the bat.

Frequently Asked Questions About FHA Refinances

Still have some questions about FHA refinances? Here are a few commonly asked-about topics and their answers.

How Soon Can You Refinance a FHA Loan?

The FHA refinance waiting period will depend on the type of refinance you're applying for. The streamline refinance requires you to wait at least 210 days since you closed on your current loan. On the other hand, a cash-out FHA refinance requires you to have occupied your home for at least 12 months.

What Is the FHA Refinance Rate Today?

The FHA refinance rate will almost always be lower than the current conventional rate because of the program's government backing. Be warned, however, that mortgage insurance premiums can drive up the loan's APR. Check out these up-to-date lender offers to see the FHA refinance rates today.

Where Can I Find an FHA Refinance Calculator With MIP?

Unlike conventional loans, all FHA refinances require you to pay mortgage insurance premiums regardless of how much equity you have in your home. Unfortunately, these costs aren't always as straightforward to calculate as basic principal and interest payments. Check out the Mortgage Research Center FHA refinance calculator with MIP included for an accurate picture of your refinance costs.

Bottom Line

FHA refinances are a great way to reduce monthly mortgage costs or borrow the funds needed to cover home improvement projects and other expenses. Qualifying for an FHA mortgage is easier than other programs, and current loan holders may be eligible for a streamline refinance that's much simpler than other refi alternatives.

However, all FHA refis come with mortgage insurance premiums, and borrowers with good credit and a healthy financial profile may find lower rates through other programs. For an accurate picture of your options, including the FHA refinance loans that will best fit your needs, apply with a reputable lender today.