FHA Refinance: Are You Eligible To Refinance With The FHA?

The Federal Housing Administration (FHA) home loan is a favorite for many American homebuyers. Its affordability and simple qualification requirements make it attractive to borrowers with a less-than-perfect credit score, low down payment, and low to middle income.

Besides that, it is one of the easiest mortgages to refinance. In fact, FHA refinance requirements are just as relaxed as the requirements for borrowing the original loan, which makes it one of the best channels to make significant savings.

Perhaps that leaves you wondering whether you should refinance to FHA. Are you eligible? What if your current mortgage is not FHA? Will the benefits outweigh the costs? What are your FHA refinance options?

We have covered all that and so much more in the following sections to help you make a sound financial decision. In case of any doubts, we encourage you to reach out to our mortgage experts here at Mortgage Right, and we will answer all your questions.

Types of FHA Refinance

There are two FHA refinance options, each of which comes with its unique set of benefits and considerations.

  • FHA streamline refinance

If you are a homeowner with an existing FHA mortgage, you may be eligible for an FHA streamline refinance. This option allows you to secure lower interest rates, adjust the term of the mortgage and/or get better lending terms and conditions.

The best part is that you get to enjoy a streamline refinance process, meaning most of the legwork and paperwork is eliminated. You won’t be subjected to income or employment scrutiny, neither will you be asked to do a home appraisal. There’s no minimum credit score, and that opens the door for virtually any FHA mortgage holder.

Between the two options, this one is much better if you’re mainly focused on lowering your rate and monthly payments. But if you are cash strapped you may want to consider this second option.

  • FHA cash-out refinance

This option allows you to lower the interest rate charged on your mortgage and also get cash in the process. How it works is that the lender will allow you to refinance your home for more than what you currently owe. Meaning you will get more money than you owe. That will enable you to pay off the original mortgage and still have some leftover cash for your own use.

You must, however, have some built-up equity in your home because the FHA will only allow you to refinance up to 85% of your home’s value. The FHA cash-out refi is an ideal way of tapping into your home’s equity when you are in need of cash.

When Is The Right Time for an FHA Refinance?

Whether you choose the FHA streamline of FHA cash-out option, the timing of your refinance will have a big impact on its success, and your ability to save. Under certain conditions, the costs of a refinance might outweigh the benefits. But if you get your timing right you enjoy more benefits.

So when should you consider an FHA refinance? The following pointers may suggest that it is the perfect time for it:

•    When interest rates fall: the whole point of refinancing is to lower the rate of your mortgage. If there’s a chance that you can score a significantly lower rate that your current one then it may be time to refinance. But keep in mind that the difference should be significant enough to help you save even after all the costs of closing the FHA refinance have been considered.

•    When interest rates are expected to rise: if you currently have an FHA adjustable-rate mortgage (ARM) and anticipate that interest rates will increase, you could refinance it to the current lower rates (and switch to fixed-rate) to shield yourself from the future higher rates. The only problem is predicting interest rates is not an easy thing, especially if you’re not a mortgage professional. But the good news is that our mortgage experts here at Mortgage Right have mastered the trends in interest rates and can help.

•    When your income increases: refinancing your FHA mortgage gives you a perfect opportunity to pay off the current mortgage and take a new one with higher monthly payments. That shouldn’t be a big problem if your income has increased. It will help you shorten the term of the loan. For example, you can refinance from a 30-year to a 15-year FHA mortgage.

•    When you need cash urgently: with the FHA cash-out refinance option, you can tap into your home’s equity, get some cash and still secure a lower interest rate and better lending terms. That is killing two birds with one stone.

Advantages of FHA Refinance

Obviously being able to lower your mortgage rate (and monthly payments) is undoubtedly the biggest advantage of FHA refinancing. That alone can help you save a lot of money that would otherwise have gone into your mortgage payments. But it’s not the only advantage of this type of refinance.

Here are some more:

  • The streamlined option features fast processing and few steps to closing
  • The cash-out option makes it easier to get emergency money without getting into high-interest debts like a credit card.
  • No income or employment verification
  • No appraisal needed
  • No penalty when you prepay the original FHA mortgage

Are You Eligible To Refinance With the FHA?

As mentioned already, qualifying for an FHA refinance is easier compared to most other types of refinances. But your application will still go through an underwriting process. You may be eligible whether your current mortgage is FHA-insured or not.

Below are the things that lenders typically check:

1)    If your existing mortgage is  an FHA-insured loan you should:

  • Have owned and lived in the property as your primary residence for at least 6 months
  • Be current on all your mortgage payments
  • Not have more than one late payment in the last 12 months
  • Be able to pay all the upfront costs out of pocket; you can’t roll them into the new loan
  • Remain with a debt-to-income ratio of at least 41% after the refinance

NOTE: while there are no specific credit score requirements, most lenders will ask for a minimum of 580. If yours is below that, you may be asked to make a down payment. If you are applying for an FHA cash-out refi, you will also be required to do an income verification and property appraisal.

2)    If your existing mortgage is not FHA-insured (i.e. it is either a conventional, VA or USDA home loan) you should:

  • Be using the property in question as your primary residence
  • Be current on payments for the existing non-FHA mortgage
  • Have a minimum credit score of 500
  • Have 85% LTV if you are applying for an FHA cash-out refinance. Some lenders will allow up to 95% if you have a credit score of 680 or more
  • Remain with a debt-to-income ratio of at least 43% after the refinance
  • Be able to complete a 3-month trial if your current mortgage is underwater

Think you’re eligible for a FHA refinance? Or perhaps you’re trying to determine whether your application can be approved? Contact Mortgage Right today, and we will help you find out. Our mortgage experts will help you find the best FHA refinance deal possible.