Can You Refinance an FHA Loan? 

06.10.2022 | Category: Refinance

As mortgage interest rates continue to increase, homeowners can look into refinancing to save money. According to data analytics firm Black Knight, approximately 1.3 million borrowers are still well-positioned to refinance, including Federal Housing Administration (FHA) loan borrowers.

Refinancing your FHA loan can lower your interest rate and, as a result, your monthly payment. So, if you’re considering this path, know that you have several options.  Below, we’ll look at six ways to get a new, replacement mortgage, such as FHA cash out refinance, their benefits and their requirements.

FHA Streamline Refinance

This fast and simple program requires little paperwork. This is because there's no home appraisal or, in many cases, credit check and income verification needed. However, you can only get a maximum of $500 cash back, and you may have to prove whether or not you're occupying the property.

Borrowers stand to benefit from the FHA Streamline Refinance's speedy process. In addition, the minimal requirements can reduce the closing costs, which you will have to pay just as with a regular mortgage.

How to qualify:

• Have an FHA insured loan
• Have your existing loan for 210 days
• Prove you have made at least six payments on your existing mortgage
• Be current on your payments and have no late payments
• Show that your interest rate is lower or that your loan term is shorter by at least three years with the new loan

Simple FHA Refinance

This option allows you to replace your current FHA insured loan with a new one, such as switching from a fixed rate to an adjustable-rate mortgage (ARM) or vice-versa. Since you already have an FHA loan, the process moves quickly.

As interest rates spike, borrowers can benefit from Simple Refinances to get out of an existing ARM loan and lower their interest rate. Further, you can finance your closing costs – easing out-of-pocket expenses – and remove co-borrowers from the original loan as your personal circumstances dictate. 

But as with other similar programs, there is also a downside: you can't take cash out from your home equity, which translates to not being able to refinance for more than your home's worth. 

How to qualify:

• Have an FHA insured loan
• Be current on your payments and satisfy payment history requirements
• Meet the minimum requirements for credit score, income and other assets
• Facilitate home appraisal

FHA Cash-Out Refinance

If you’ve built your home equity for a time, you can get a second mortgage and take out more money through FHA Cash Out Refinance. Since your property has increased its market value, you can cash out the difference when you refinance and use it to fund large upcoming expenses, such as sending your children to college or remodeling your home. Note that you don’t have to take out the full available amount.

Additionally, you don’t need an existing FHA loan to qualify for the program. But you may have to start searching for “a mortgage lender near me” to know what to do and not to do, such as having your home appraised.

How to qualify:

• Have made payments on time for at least the last 12 months
• Ensure your home has enough equity with a maximum Loan to Value of 80%
• Have a minimum credit score of 580
• Meet the debt-to-income ratio standards

Rehabilitation Loan

Known as the 203(k) Rehabilitation Loan, this type of loan combines mortgage payments and renovation and repair costs in one. So with a single FHA loan, you can remodel or renovate your property without having to take out a home equity loan or credit line.

Moreover, borrowers can choose from two types of rehab loans: limited or standard. The limited 203(k) loan covers renovations of less than $35,000 and excludes major structural repairs. On the other hand, the standard loan is designed for more extensive renovations amounting to more than $35,000, with a minimum loan amount of $5,000.

How to qualify:

• Have a steady, verifiable income
• Meet the minimum credit score
• Show that you are an owner-occupant of the property
• Purchase mortgage insurance and pay an upfront mortgage insurance premium (MIP) or an annual MIP 
• Provide a rehab proposal describing what needs to be done and how much each repair or improvement is estimated to cost

Reverse Mortgage 

The FHA Reverse Mortgage or Home Equity Conversion Mortgage (HECM) is designed for homeowners aged 62 and above. This mortgage allows the borrower to convert home equity into income or credit line and it’s paid back when the homeowner no longer occupies the property. Another benefit of a reverse mortgage is that it lets you finance your closing costs.

There are no income or credit qualifications for this type of loan, but you are required to have a property appraisal since the FHA reverse mortgage amount is based on the home's value or the FHA insurance limit, whichever is lower. 

How to qualify:

• Be at least 62 years old if you are the sole borrower or the youngest among co-signers
• Get consumer counseling and education prior to loan approval
• Prove that you own and live in the home as your primary residence

Conventional Loan

Refinancing an FHA loan is not limited to FHA cash out refinance and other programs. You can also take out a conventional loan if you have improved your credit score and grown equity in your home. This option enables you to get rid of your MIP and reduce your monthly payment.

Requirements and benefits may vary from lender to lender. So ensure you can afford the new loan. Try our mortgage calculator to find out if you can afford to replace your FHA loan with a conventional one. Specifically, you can check if a mortgage refinance with Mutual of Omaha Mortgage could lower your monthly payment using our refinance mortgage calculator.

Here’s a list of expected requirements if you choose to refinance with us.

How to qualify:

• Have a steady, verifiable income
• Meet the minimum credit score
• Satisfy debt-to-income ratio standards
• Get homeowners insurance
• Facilitate a home appraisal

Factors To Consider Before Refinancing an FHA Home Loan

To recap, refinancing an FHA loan enables you to get a lower interest rate, take more money from the equity in your home and move to a different mortgage provider. It can also protect you from rising interest rates by permitting you to swap out from ARM to a fixed-rate mortgage.

However, you also have to be aware of closing costs and refinance fees. As a result, you may also end up with a higher interest rate. With that said, let's look at a few factors that can impact your ability to afford FHA loan refinancing:

• Closing costs and refinance fees. These out-of-pocket expenses should not be the same or more than what you spent when you got your first mortgage.
• Higher interest rates. The interest rate may go up if you move from a fixed-rate mortgage to an ARM.
• Large upcoming expenses. Taking out cash against equity should be justified to ensure you're creating value with that extra money you will get.

To avoid getting into greater debt because of the factors above, see to it that you compare your options and assess the products available from lenders. It's not enough to search for a "mortgage lender near me" and pick the first result you see. Aside from the offerings, choose a private lender with a sterling track record and undisputed quality of service.

Let Us Help You Save on Your Monthly Mortgage

With Mutual of Omaha Mortgage, you can refinance your home mortgage loan according to your personal circumstances and preferences. In addition, you can save money by lowering your monthly payment with our competitive interest rate or changing the term of your loan.

Whatever motivates you to consider refinancing, it matters to us. Start by comparing your current loan to one with new terms and calculating your potential savings. And then, reach out to one of our mortgage experts to learn more about the requirements and benefits of refinancing your FHA loan.

We're here every step of the way for those buying a home or refinancing their mortgage.