Basics of FHA Refinance and FHA Streamline Refinance

What is an FHA refinance? Like any other refinance mortgage, it is a loan that is used to pay off a home mortgage, but it is insured by the Federal Housing Administration instead of a private mortgage insurer. The homeowner pays mortgage insurance premiums to FHA.

When should you consider an FHA refinance?

An FHA refi may be your best deal when you don't have a lot of home equity, or when risk-based surcharges make conventional mortgages too expensive. FHA requirements are less stringent than those of conventional lenders, so if your credit rating needs improvement, you may qualify for a better rate with an FHA refinance.

If you are current on your loan but your home value makes it impossible for you to meet a conventional lender's requirements for loan-to-value ratio or LTV, an FHA refinance could be right for you. It is difficult to refinance a home with a conventional mortgage if you have less than 20 percent equity (which means you'll probably need private mortgage insurance). In declining housing markets, private mortgage insurers can be reluctant to provide coverage because of the increased risk of default.

FHA is more liberal in its approach. As of September 2010, for qualified homeowners, FHA allows refinance mortgages with the following LTV limits:

  • Rate and Term (or No Cash Out) Refinances 97.75 percent
  • Refinances for Borrowers in Negative Equity Positions 115 percent (through December 2012 only)
  • FHA-to-FHA Streamline Refinances With or Without Appraisals 125 percent
  • Cash-out Refinances 85 percent

In addition, FHA mortgage amounts are limited by law to the lesser of 125 percent of local median home sales prices or $729,750 for single-family residential mortgages. "Local" usually means your county or metropolitan statistical area (MSA). In areas where 125 percent of the median is less than 65 percent of the Freddie Mac loan limit, the maximum loan amount for a single-family residential home is $271,050.

What kinds of FHA refinances are there?

There are three basic types of FHA refinance. Your available choices depend on your situation. Check with your lender for all eligibility requirements.

  1. FHA streamline refinance: You already have an FHA loan, you are current on that loan, and you are not taking out cash. An FHA streamline refinance generally does not require you to re-qualify; that is, your credit and income are not considered because FHA is already insuring your loan. However, your new loan must put you in a better financial position.
  2. No-cash-out (rate and term) FHA refinance: You have a conventional mortgage or an FHA mortgage and you replace it with the new loan. If you have enough home equity and wish to do so, you may also pay off any other mortgages against the property (like a home equity loan) and wrap your closing costs into the new loan as well.
  3. Cash-out FHA refinance: You have a conventional mortgage or an FHA mortgage, you have sufficient equity (FHA allows you to finance 85 percent of your home's value if you take cash out), and you want to borrow additional cash against that equity.

How do you find an FHA lender?

RefinancingRight.com provides a list of FHA-approved lenders in your state. Contact any of them for more information about how an FHA refinance can save you money and whether it is the right choice for your financial situation.