What is an FHA Loan?
FHA loans are mortgages insured by the Federal Housing Administration. This means that lenders can offer mortgages with more flexible credit standards and lower interest rates than other programs. Refinancing with an FHA loan is a great option for homeowners looking to lower their monthly payment or tap their home equity for cash.
FHA Refinance Options
- Rate-and-term: A rate-and-term refinance pays off the current mortgage on your property and replaces it with a new one that has a longer term or lower interest rate, lowering your monthly payments. There are two types of rate-and-term refinances, one is exclusively for homeowners that already have an FHA loan, called a streamline and the standard program is for anyone else.
- Cash-out: A cash-out refinance is a new mortgage with a loan amount greater than your current loan balance. It pays off your current mortgage and leaves you with the cash that is left over.
FHA Loan Qualifications
These are the general guidelines you need to know when considering an FHA loan. The Streamline option has even more flexible lending standards which are detailed further below.
- Occupancy: FHA financing is only available if you live in the home more than 6 months in the year, or for certain second homes. It is not available for investment properties.
- Credit Score: The minimum credit score to qualify for an FHA loan is 500, but borrowers with a score of 580 or higher can make a smaller down payment.
- Employment History: FHA lenders typically require borrowers to have a steady employment history of at least two years. Education in your field of work counts as employment history
- Debt-to-Income (DTI) Ratio:
- Property Type: FHA loans are available for single-family homes, multi-family properties (up to four units), and certain approved condos.
Streamline
The streamline option is a great option for borrowers that already have an FHA loan and are looking to lower their monthly payment by refinancing into a longer term or securing a lower interest rate. The FHA streamline program is a type of rate-and-term refinance that has a number of advantages over the typical program.
Benefits
- Much faster timeline
- No appraisal required
- No credit score required
- No Income verification required
- Available to borrowers in active or complete forbearance plans
- Lower your monthly payment with an extended term or lower rate
Do I Qualify?
- Property must already have an FHA loan
- Borrower must make mortgage payments on time for 6 months prior to application and have no more than one 30-day late payment in the previous 6 months prior
Rate-and-term
An FHA rate-and-term refinance is a great way for borrowers with an FHA or conventional loan to lower their monthly payment by refinancing their current loan into a longer term or lower interest rate.
Benefits
- Closing costs are covered by the loan
- Lower interest rates compared to conventional refinance programs
- Lower your monthly payment
- Available to borrowers in active or discharged bankruptcy
Do I Qualify?
- Minimum credit score: 500, but borrowers with 580+ scores qualify for larger loan amounts
- Maximum loan amount: 97.75% of the home’s value with credit score of 580+ and 90% with score below 580
Cash-Out Refinance
Rather than maintaining your loan balance, the cash-out refinance allows borrowers to use their home equity to get cash.
Benefits
- Finance a home renovation
- Fund major purchases like a car or investment property
- Consolidate debts with higher interest rates (e.g. credit cards)
Do I Qualify?
- Minimum credit score: 500
- Maximum loan amount: 80% of the home’s value
- If the property has a mortgage, there must be a minimum of 6 months of mortgage payments made on time.