Can I Refinance My Home with an FHA Loan?
No matter what kind of mortgage loan you have on your home now, if you’re considering refinancing it, the whole world’s your oyster. That mortgage can usually be refinanced into anything else, including the popular FHA program. Before you jump into an FHA refinance, however, let’s look at what it actually involves. There may be additional fees involved that aren’t part of your current financial picture.
Qualifying for an FHA Mortgage Refinance
Generally, qualifying for an FHA loan of any type is easier than a conventional loan. This is because the funds are insured by the government, giving banks more confidence to loan to riskier borrowers. Even though you’ve already established a good track record of on-time mortgage payments, banks may still be understandably nervous if you have a short or poor credit history.
That’s not an issue with FHA refinancing. Credit scores as low as 600 are often given cash out FHA mortgage refinance loans of up to 85 percent of the value of the home in question.
In many cases, you can even wrap the cost of the refinance into the loan, keeping more cash in your pocket. In short, qualifying for an FHA mortgage refinance is easier because of:
Lower credit requirements
Lower loan to value requirements
Lower cash injections
But, of course, that’s not the whole story. The FHA has a few particular rules about who they’ll insure a loan for. They’re vouching for you, after all. These are the current requirements for a new cash out FHA mortgage refinance loan:
The property must be owner-occupied. No cash-outs for rental units, sorry.
A solid mortgage payment history. Your mortgage must be at least six months old, with no more than one late payment in the last 12 months (or total history if under a year).
Home value based on length of ownership. If you’ve lived in your home less than a year, your loan amount will be based on the appraisal you had at the time of your purchase, not a current appraisal. This is a sticking point for many homeowners looking to capitalize on rapidly rising real estate values.
Income to debt ratios. Just like when you apply for an FHA purchase loan, you have to meet program acceptable income-to-debt ratios set out for mortgage refinances. As of the writing of this page, FHA will allow about 29 percent for your housing costs and 41 percent for all of your debt payments together.
You must see a tangible benefit from the refinance. This doesn’t necessarily mean you have to get a lower rate, but you have to get something out of the deal -- a better loan, a big pile of cash, a fixed rate, a big cookie bouquet -- something.
Fees Involved in FHA Refinancing
Oh, and don’t forget the extra fees. You definitely want to consider these, because they’re a bit different than with other programs. The FHA basically has two types of mortgage insurance, as opposed to the single type of mortgage insurance on a conventional loan.
Upfront mortgage insurance through FHA costs about 1.75 percent of the loan amount (this can change from year to year). You can typically finance that into your loan, and it’s a choice many borrowers make. The second type is paid monthly, and it’s based on your equity, your loan-to-value ratio, and the length of the loan term you’re looking to refinance into.
For most buyers seeking a 30 year FHA refinance mortgage, the monthly mortgage insurance payment (as of 2018) is going to be 0.80 to 0.85 percent of the outstanding principal debt, divided by 12. Each month, it gets a little smaller (which is nice if you’re the one paying for the privilege of not defaulting on your mortgage).
Monthly mortgage insurance is also something you’ll see on conventional loans, but there’s a big difference. On FHA loans, if you have less than 10 percent equity when the papers are all done, you’re paying that insurance for the term of the loan. It doesn’t just drop off like it does on a conventional loan. This is definitely something to consider if you plan to stay in your home long-term.
Refinancing With FHA is Right For Some
Despite the differences between FHA and other programs, an FHA refinance loan could be right for you. The relative ease of qualification and willingness to loan more against your home’s equity than other programs make it very attractive. Sometimes you just need that extra few grand to put in the new patio and add a backyard swan fountain.