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How to Refinance an FHA Home Loan: FHA Mortgage Refinancing

Updated
Matt Frankel, CFP®
Author: Matt Frankel, CFP®
Matt Frankel, CFP®
Matt Frankel, CFP®
Writer, Analyst

Matt is a Certified Financial Planner™ and investment advisor based in Columbia, South Carolina. He writes personal finance and investment advice for Motley Fool Money and its parent company The Motley Fool, with more than 4,500 published articles and a 2017 SABEW Best in Business award. Matt writes a weekly investment column for the Motley Fool ("Ask a Fool") that is syndicated in USA Today, and his work with Motley Fool Money has also been syndicated to MSN and Yahoo! Finance. He has been regularly featured on Fox Business and many other major outlets. He’s a graduate of the University of South Carolina and Nova Southeastern University, and holds a graduate certificate in financial planning from Florida State University.

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Mortgage rates have dropped dramatically in the past year, including FHA mortgage rates. If you want to reduce your interest rate, an FHA refinance could be a very smart move. In this article, we'll take a look at FHA refinancing and the general steps you'll need to take to refinance your loan.

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Can you refinance an FHA mortgage loan?

The short answer is yes. If you have an FHA mortgage loan, you don't have to keep paying it down until the end of its term. In fact, if you can lower your interest rate, you might save quite a bit of money. Try our mortgage calculator to see how much you could save with an FHA refinance.

That said, there are certain qualification requirements, costs, and other factors that come into play. Not everyone who has an FHA loan can refinance. For example, you might run into trouble if your home has declined in value since you bought it, or your credit score has dropped below the FHA minimum.

How to refinance an FHA home loan

Getting a mortgage refinance is a pretty involved process. Here's a general outline of the steps you need to take.

1. Find out if you're eligible

There are two kinds of FHA refinancing loans -- streamlined or cash-out. Each has different requirements.

For a streamlined refinance, all you'll need is an existing FHA mortgage that's in good standing and is at least six months old. It's much easier to qualify, but you won't be able to take cash out.

The other type is a cash-out refinance, where you borrow more than the amount you owe on your existing mortgage and keep the extra money. For an FHA cash-out refinance, you'll need to:

  • Prove the home is your principal residence and you've lived there at least 12 months.
  • Have a 12-month track record of on-time payments or own the home free and clear.
  • Have a loan-to-value (LTV) ratio of 80% or less. Your LTV ratio is the amount you owe on your home vs. the appraised value of your home.
  • Have a minimum credit score of 500 and a debt-to-income ratio of 50% or less.

2. Get pre-approved by lenders

Notice that "lenders" is pluralized. Not every lender will offer you the same rates, fees, and terms, so it's important to shop around. A pre-approval is a firm commitment to lend money. You'll have to fill out some identifying information to get pre-approved. But you'll also get an accurate picture of the interest rates and other costs you'll have to pay. Start with a few of our favorite lenders for FHA loans and compare their offers.

3. Decide on the best loan option and apply

Once you've got rates from a few different lenders, apply with the best one for you. Be prepared to upload documentation, especially if you're planning to take cash out.

FHA refinance loan types

There are two main types of FHA loan refinancing loans:

  • FHA streamlined refinance: The FHA offers a streamlined refinance option for borrowers who want to quickly refinance an existing FHA loan to get a lower rate and/or monthly payment. The biggest caveat to the FHA streamline refinance program is that you can only take up to $500 in cash out of your home. However, there's a big advantage: You hardly have to provide any documentation. As long as your existing loan is current (and you have a history of on-time payments) and is at least six months old, you won't have to go through the FHA appraisal process again.
  • FHA cash-out refinance: If you want to tap into your equity (say, to finance home improvements or to fund a major purchase), there is an FHA cash-out refinance option. However, the process is a bit more involved. Specifically, you'll need to re-qualify based on your credit and income, and you'll need to get a new appraisal. The maximum LTV on an FHA cash-out refinance is 80%.

You don't have to use another FHA loan to refinance. In fact, if you have strong credit and at least 20% equity in your home, you could refinance with a conventional mortgage. If you're not sure about the difference, find out more about an FHA vs. conventional loan.

FHA loan refinance fees

For an FHA streamlined refinance loan or cash-out refinance, there is an upfront mortgage insurance premium of 1.75% of your loan amount. This can be rolled into your loan. It's important to note that this is in addition to any other closing costs your lender may charge, such as an origination fee.

Speaking of mortgage insurance, it's important to emphasize that FHA mortgage insurance is perhaps the single largest drawback to this type of financing. Most loans require mortgage insurance if you put down less than 20%. But with a conventional mortgage, it will eventually go away when you pay down some of the loan. With an FHA loan, it typically sticks for the entire term.

The only way to avoid mortgage insurance when refinancing an FHA loan is to refinance it with a conventional mortgage and have an LTV ratio of 80% or lower. If your credit and income are sufficient to qualify for a conventional refinancing loan, it's certainly worth looking into.

Am I eligible for an FHA loan refinance?

Probably. If your loan is in good standing, you don't want to take cash out, and you meet the FHA's basic credit requirements, you should be eligible. As we've seen, if you want to take cash out, the vetting process is a little more thorough.

If you have an existing FHA loan and want to lower your interest rate, start by shopping around. Fill out applications with a few of the top mortgage lenders to see what you can get. It might take a little time but could save you thousands in the long run.

Still have questions?

Here are some other questions we've answered:

FAQs

  • Yes. It's relatively easy and fast to refinance an existing FHA loan in good standing if you don't want to receive cash at closing. FHA cash-out refinancing is available, but requires an appraisal as well as more of a vetting process to make sure the borrower qualifies.

  • The FHA doesn't loan money directly, so you'll need to find a mortgage lender that makes FHA loans (fortunately, most do). The best course of action is to pick a few lenders that offer FHA refinancing loans, fill out their pre-approval applications, and choose the lender with the best rate and fee offer for you.

  • The short answer is that it depends if you want to receive cash at closing (cash-out refinancing). If you don't want to receive cash, you can use the FHA streamline refinance loan. This has very few requirements other than having an existing FHA loan in good standing. For cash-out refinancing, you'll need an appraisal to confirm a loan-to-value ratio of 80% or lower, an acceptable credit score and income, and you'll need to prove that you're living in the home.

Motley Fool Money's best mortgage refinance lenders

Refinancing your mortgage could save you hundreds of dollars for your monthly mortgage payment and secure you tens of thousands of dollars in long-term savings. Our experts have reviewed the most popular mortgage refinance companies to find the best options. Some of our experts have even used these lenders themselves to cut their costs.

Best mortgage refinance lenders