How to refinance into an FHA loan
Homeowners with an FHA loan may be able to take advantage of a streamlined refinance, but even homeowners with conventional loans can often achieve benefits by refinancing into an FHA mortgage loan.
How to qualify for an FHA refinance:
To apply for an FHA refinance, you will need the following basic qualifications:
- A valid Social Security number
- Legal residence in the U.S.
- Legal age to own a home in your state
FHA loan requirements
Credit qualifications required for an FHA loan are not spelled out by the FHA because it is not a direct lender. FHA provides guidelines to lenders about debt-to-income ratios and the creditworthiness of borrowers, but the lenders themselves decide which borrowers can be approved for mortgage refinancing.
In general, FHA loans require a credit score of 580 or higher, but some lenders may require a higher credit score. Lenders say that FHA loans are usually approved for borrowers with an overall debt-to-income ratio (all monthly payments compared to your monthly gross income) of about 43 percent. Lenders prefer all housing payments (principal, interest, taxes, insurance) to represent 31 percent or less of your monthly gross income. Borrowers with significant income or assets may qualify at higher ratios.
All FHA loans must be below the limits established by area. Check here for your area.
FHA loan refinancing requirements
- Loan to value: Homeowners with conventional loans can borrow up to 97 percent of the equity in their home.
- Streamline refinance: if you already have an FHA mortgage and want to refinance into a lower interest loan or a fixed-rate loan, you may be able to qualify for an FHA streamline refinance. A streamline refinance still requires you to provide paperwork proving your income, assets and credit score; however, in some cases you may be able to qualify for a new loan without a home appraisal. A lender will be able to provide you with information based on your individual circumstances, but, generally, an appraisal is not required if the new mortgage amount is the same as the original mortgage.
- 125-percent mortgage: Borrowers with an FHA-insured first mortgage and a second mortgage or a home equity loan may qualify for a refinance up to 125 percent of the value of the home. The refinance may be approved if your monthly payments will be reduced by 5 percent or more, you are switching from an ARM or interest-only loan to a fixed-rate loan, or you are shortening the term of your home loan.
FHA loans and mortgage insurance
While FHA loans offer the possibility of refinancing even if you have less-than-perfect credit or your home has lost some of its value, these loans also require mortgage insurance. Borrowers can usually wrap the upfront mortgage insurance costs into their loan as long as there is enough equity in the property. The upfront mortgage insurance premium is currently 2.25 percent for all FHA loans, including regular and streamline refinances. In addition, a monthly mortgage insurance premium will be included in your regular payment.
In addition to the mortgage insurance costs, your lender will provide you with a Good Faith Estimate of other anticipated closing costs associated with refinancing a mortgage. You may be able to wrap these closing costs into your new mortgage if you have enough equity in your home.
FHA loan options
Homeowners interested in making improvements to their property may find the FHA 203(k) loan helpful. This loan, available both for purchase loans and refinancing, allows borrowers to wrap the construction or repair costs of a project (or more than one project) into their new home loan. Qualifying for an FHA 203(k) loan is the same as qualifying for any other FHA-insured mortgage, except that the appraised value of the home is based on both the current home value and the estimates of repair or improvement costs.
Borrowers must qualify for the full amount to be borrowed. For example, if your home is currently valued at $200,000 and you want to spend $20,000 on a new kitchen, you must be able to qualify for a new home loan of $220,000. You must spend a minimum of $5,000 to take advantage of a 203(k) loan.
Whether you want to make home improvements or lower your monthly payments, there are lots of good reasons to investigate an FHA home refinance.