FHA Refinance: Options & Requirements
The Federal Housing Administration (FHA) is the largest insurer of residential mortgages in the world, covering millions of properties since 1934. As part of the U.S. Department of Housing and Urban Development (HUD), they insure mortgages on single and multifamily properties, residential care facilities, as well as hospitals.
With more flexible credit expectations and lower down payment requirements it’s easy to see why approximately one in five buyers use the FHA to procure their first home. But although the organization is well known for being a conduit to first-time homeownership, it also offers great government-backed programs for current homeowners who wish to refinance their mortgage.
Thanks to low interest rates and a cautiously optimistic economic outlook, refinancing may be a financial solution for many. Let’s look at the most common FHA refinance requirements and the programs they apply to:
FHA Streamline Refinance
Homeowners with existing FHA-insured mortgages can use the FHA Streamline program to refinance. Also referred to as a low-doc program, the FHA Streamline requires limited borrower documentation and underwriting, and typically no new property appraisal. Borrowers can’t take more than $500 out of refinance – in other words, no cash-out option. FHA doesn’t allow lenders to roll closing costs into the new mortgage, so “no cost” offers will usually reflect in the interest rate. Other basic FHA refinance requirements include:
- The mortgage must already be FHA-insured.
- The primary residence is being refinance.
- The current mortgage must be up to date on payments for the last six months.
- At least 210 days have passed since closing on the original FHA loan.
- The refinance must show a net tangible benefit (NTB) to the homeowner. (This amount will vary based on the type of loan, interest rate and/or term of new loan.)
FHA Cash-Out Refinance
The FHA cash-out refinance is an option for either current FHA or conventional mortgage borrowers. By accessing the growing equity in the home, homeowners can obtain a new mortgage with a lower rate and receive cash for the difference between the new loan amount and the current value.
As with any cash-out refinance, the funds can be used to consolidate high interest debt, pay off medical bills or student loans, or perhaps make home improvements that will further increase the property’s value. While there are no restrictions on the use of funds like those attached with other refi options, there are some additional FHA refinance requirements that may vary by lender:
- Owner-occupied (the property must be primary residence) with mortgage paid for at least 12 months prior.
- Zero late or missed payments in the previous year.
- Have a minimum credit score of 580. (This is FHA required; lenders’ minimum score may vary.)
- Maximum loan-to-value (LTV) ratio or 80% or 20% equity based on appraisal.
- Maximum debt-to-income (DTI) ratio of 43%.
- Resolve any federal tax or non-tax debt prior to refinancing. This may involve a payment plan agreed upon by the creditor and lender.
FHA Rehab Refinance
Just as buyers who use an FHA Rehabilitation Loan to purchase a home that requires significant work, current homeowners can refinance with an FHA Rehab program. As the name implies, this loan is for improvements and repairs. There are requirements in place that dedicate the funds exclusively to the projects requested in the loan. Some of repairs that HUD allows the financing to go toward include:
- Elimination of potential health and safety hazards
- Modernizations and upgrades
- Replacing or reconditioning plumbing or septic systems
- Providing accessibility for the disabled
- Energy efficient improvements
- Repairing or replacing roofing or flooring
Refinancing with an FHA program can be a viable option for homeowners who are unable to meet stricter qualification requirements, such as high credit scores. When weighing the pros and cons, be sure to factor in closing costs, refinance fees and mortgage insurance premiums (MIP).
These will vary by lender, so we invite you to call Titan Mutual Lending Inc. for current rates and honest feedback on the best path for your personal financial situation. We have years of experience and knowledge in all areas of the mortgage process, including FHA refinancing. Give us a call!