FHA Loan Refinance: Requirements and Options (2024)

As housing market trends shift over time, refinancing can be a powerful tool for homeowners, allowing you to get better rates and reduced monthly payments on your mortgage than when you purchased. The FHA loan is backed by the Federal Housing Administration and has several benefits that conventional loans might not. Government-backed loans typically have more relaxed qualification requirements, making them easier to obtain.

FHA loans offer unique options for homeowners who may have poor credit histories or higher debt-to-income ratios.

Whether you already have an FHA loan or you want to refinance into one, let’s explore the types of FHA refinances and which one is right for you.

FHA Streamline Refinance

The FHA Streamline Refinance allows borrowers who already have an FHA loan to quickly refinance the loan in order to get lower interest rates and monthly payments. The main benefit of the Streamline Refinance is that it usually doesn’t require a new appraisal.

If you want to quickly shorten the term length of your loan or reduce your monthly payments, the FHA Streamline Refinance is probably the best option.

There are different sets of requirements for the FHA Streamline depending on whether or not you’re lowering the length of your loan term. Let’s take a look.

Requirements for a Term Reduction:

• You must already have an FHA loan; you cannot refinance from a conventional, VA, or USDA loan into an FHA loan through the Streamline Refinance.
• You may not have any payments more than 30 days late on your current mortgage within the past six months. You also may not have more than one payment late within the last 12 months. This timeline allows for one missed payment within the past year, as long as it wasn’t within the most recent six months.
• There must be a “net tangible benefit.” This means that the refinance must result in better loan terms that offer the homeowner some kind of financial benefit. If you’re reducing your loan term length, this includes the following:
  • A loan term length three years shorter than the existing loan.
  • Your new total monthly payment can’t exceed $50 more than the previous payment.
  • For fixed loan to fixed loan refinances, the previous interest plus mortgage insurance premium must be lower than the new rate. For Adjustable Rate Mortgage (ARM) loans to fixed loans, the combined rate cannot be more than 2% higher than before.

Requirements Without a Term Reduction:

• On a fixed loan to fixed loan refinance, the combined interest rate on your new loan must be at least 0.5% lower than the combined interest rate on your current loan.
• On a fixed loan to ARM loan refinance, the combined interest rate must be at least 2% lower on the new loan than your previous combined rate.
• On an ARM loan to fixed loan refinance, the new interest rate cannot be more than 2% over your previous combined rate.
• On an ARM loan to ARM loan refinance, the new interest rate must be at least 1% lower than your previous combined rate.

FHA Cash-Out Refinance

An FHA cash-out refinance allows you to convert your home’s equity into cash by refinancing your current home loan into a larger loan matching your new appraised value, receiving the difference directly as a cash payment. Homeowners can refinance up to 80% of the home’s value this way.

The cash-out refinance is a great option for homeowners who want to fund home repairs or home renovation projects. However, the funds can be used for anything, so this is also a great option for homeowners who have a lot of equity in their home and need cash for emergency funds, paying off student loans, and more.

This option is available to any homeowner. Unlike other FHA refinance options, homeowners with conventional loans (or other loan types) can refinance into an FHA cash-out refinance. This is a great advantage for borrowers who may struggle to qualify for a cash-out refinance of a different loan type due to the looser FHA requirements.

FHA Cash-Out Refinance Requirements:

• FHA guidelines have a minimum credit score requirement of 580, though most lenders require a credit score of at least 600
  • If your loan-to-value (LTV) ratio is 90% or lower, you might be able to qualify for an FHA refinance with a credit range of 500-579
• Your debt-to-income ratio must be lower than 43%
• You must have more than 20% equity in your home
• The home must be your primary residence, and you must have lived there for at least 12 months
• You must have a 12-month history of on-time mortgage payments

FHA Simple Refinance

An FHA Simple Refinance allows you to lower your rate/monthly payment, shorten your loan term, or switch your loan type from ARM to a fixed loan.

The main difference between a Simple Refinance and a Streamline Refinance is that the Simple Refinance takes longer and requires a credit qualification and home appraisal. However, the Simple Refinance allows the homeowner to lump closing costs into the loan itself, while the Streamline requires those closing costs to be paid upfront.

If you’ve got more home equity and you don’t mind going through the credit qualification and home appraisal process, the FHA Simple Refinance allows for lower interest rates and reduces the upfront costs you need to pay.

FHA Simple Refinance Requirements:

• Your existing loan must be an FHA loan already
• The property must be a primary residence or a secondary residence approved by HUD
• You must have a history of on-time payments for the past six months
• FHA guidelines have a minimum credit score requirement of 580, though most lenders require a credit score of at least 600
  • If you’re loan-to-value (LTV) ratio is 90% or lower, you might be able to qualify for an FHA refinance with a credit range of 500-579
• The FHA Simple Refinance requires a home appraisal

FHA Rehab Refinance

The FHA Rehab Refinance loan, or 230(k) loan, is a refinance option that allows you to refinance the house and additional rehabilitation/renovation costs into a new loan under a single mortgage. Just like the FHA cash-out refinance option, you don’t need to have an FHA loan already to get the FHA Rehab Refinance.

There are two kinds of FHA Rehab loans: the limited 203(k) and the standard 203(k). The limited 203(k) option allows for repairs up to $35,000 in value as long as they are not major structural changes. This is the ideal refinance option for small home improvement projects or cosmetic changes.

The standard 203(k) does not have the same limitations. Borrowers can complete major structural changes as long as the original foundation of the property stays in place, and there’s no set maximum repair value—you just can’t refinance the loan value to exceed the FHA loan limits. However, you must draw at least $5,000 from the refinance for home renovation when using the standard 203(k) option.

FHA Rehab Refinance Requirements:

• Most FHA refinance guidelines also apply to the Rehab Refinance, so the official minimum credit score is 580—and you should expect to have a minimum of 600 for most lenders
  • Like other FHA products, you may qualify with a credit score between 500-579 as long as your LTV ratio is 90% or lower
• The home improvements must fall under the HUD’s eligible activities
• A home appraisal is required
• There may be other fees and requirements depending on your specific situation, such as getting a HUD consultant for your repairs

FHA Refinance FAQs

How soon can you refinance an FHA loan?

The standard amount of time you’re required to live in your home before you can refinance with an FHA loan, such as the FHA Streamline Refinance or Simple Refinance, is six months. The FHA cash-out refinance option requires you to live in your house for a year.

How soon can I refinance my FHA loan into a conventional loan?

There is no minimum requirement for how long you must live at your house before refinancing from an FHA loan to a conventional loan.

There’s only a time requirement if you’re doing a cash-out refinance. You must live in your house for 12 months before doing a conventional cash-out refinance.

Is it hard to refinance an FHA loan?

Refinancing an FHA loan isn’t too hard, especially with the refinancing options unique to the FHA loan. An FHA Simple Refinance has the same basic credit and DTI ratio requirements you underwent when you got the FHA loan originally, and the FHA Streamline Refinance is designed to be quick and easy.

If you’re refinancing from an FHA loan to a conventional loan, you may have more difficulty. You now have to meet conventional loan credit requirements, which means most lenders will require a credit score of at least 620. Additionally, you need to have 5%-25% equity in your home. This option is popular for borrowers who have 20% or more in home equity, as refinancing to a conventional loan will allow them to get rid of Private Mortgage Insurance (PMI).