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FHA Home Loan Refinance Process

Here is our step-by-step guide to the FHA home loan refinance process.

FHA home loans are an awesome way to get your foot in the door and purchase a home if you don’t have much free cash or a high credit score. As you found out, you can buy a home with a lower down payment, which makes home-buying more accessible for all.

But let’s say mortgage rates have dropped, and it’s time to refinance. The FHA home loan refinance process is unique, and for some homeowners, it can be super fast.

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What is An FHA Home Loan? 

Before we get to the refinance process, let’s clearly define “FHA home loan”.

FHA, or Federal Housing Administration, home loans are loans backed by the US government and provided by mortgage companies to consumers. FHA is the loan insurer rather than a home loan lender. FHA home loans tend to be marketed as first-time home buyer loans, but anyone can get an FHA home loan, even repeat buyers. 

For a homebuyer to qualify for an FHA home loan, you must be purchasing a house that will be your primary residence for at least one year (no rentals!). You must put down at least 3.5% – a huge difference from the traditional 20% that conventional loans previously required (under some circumstances, you can put less than 20% down under the conventional loan program).

FHA Home Loan Refinance Requirements

Here is a list of the basic FHA home loan refinance requirements (which differ from the Conforming loan programs). The requirements might vary from lender to lender.

  • 580 or credit score
  • A current FHA home loan
  • You must have a clear benefit for doing the refinance
  • Cash-out up to 80% of the value of the home (80% LTV)
  • You’re required to work with an FHA home loan-approved mortgage company

Four Steps To A Successful FHA Refinance 

There are regular FHA refinances, and then there are FHA Streamline refinances. The Streamline refinances are meant to make the refinance process simple and speedy, and it’s unique to homeowners with an FHA home loan. Here’s what the FHA refinance process looks like.

Step 1: Double-check your loan type

If you want to access the FHA Streamline refinance program, you’ll need to ensure your current home loan is actually an FHA home loan. There are a few ways you can verify this. You can review your deed of trust, which will have an FHA case number.

That case number shows that the loan has been insured by the FHA. You can also look at your monthly mortgage bill, which will also reference the FHA on it. Finally, you can even ask any FHA-approved lender to check on your home’s FHA status.

If you currently have an FHA home loan, you can access the FHA Streamline Refinance program (lucky you!).  

Step 2: Ensure you’re refinancing for the right reason

It’s important to only refinance if there is a benefit to you. I know that sounds so simple; however, too many homeowners refinance when they shouldn’t. Benefits include lowering your home loan interest rate, shortening your term, and/or obtaining cash out.

If you are considering a cash-out FHA home loan refinance, make sure the cash out is being used to pay off high-interest debt, educational or medical expenses, or remodel the home.

With an FHA Streamline refinance, you can’t cash out more than $500. The Streamline refinance was created to help homeowners lower their mortgage payments rather than cash out the equity in their homes. If you need to cash out, the Streamline is not for you, and you’ll need to go with a regular FHA home loan refinance. 

Step 3: Gather your documents

Just like when you buy a house, when you refinance, you need to provide certain documentation. The FHA home loan refinance process usually requires the same home loan documentation you provided when you bought the house unless you are doing an FHA Streamline Refinance.

When you are ready to send in your documentation, you’ll want to make sure the copy you send is clear and complete. All the words and numbers are clear, and it’s easy to read the entire document.

If you are doing an FHA Streamline refinance, don’t worry about gathering bank statements and income documents because you won’t need them. And you won’t need an appraisal of the home!

Step 4: Verify your credit score and payment history

To qualify for an FHA refinance, you must have had no late payments in the past six months. Within the last year, you can have one late payment, but no more than that to be approved. Miss a credit card payment, car loan, and/or personal loan, but don’t miss more than one mortgage payment.

In addition, you must have had your current FHA home loan for at least 210 days. Your lender will pull a mortgage-only credit report to review this information and your credit score. Whatever refinance option you choose, be sure you have a good understanding of everything going on, and to do that, you should work with a top-rated loan officer.

Step 5: Ensure the refinance provides a net tangible benefit 

Having a net tangible benefit is so important (without it you can’t refinance under the FHA Streamline program). The FHA Streamline requires you to receive a net tangible benefit by refinancing your current mortgage. Although this varies based on your loan, the general guidelines require the following: 

  • When you refinance to reduce your term, the new interest rate must be lower than the current rate. 
  • The new mortgage payment, insurance premium, principal, and interest cannot exceed your previous payment amount by more than $50. 
  • If the term is not being reduced, your FHA mortgage insurance and interest rate must follow guidelines in regard to how much they can increase or decrease. 

Get Approved To Refinance

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FHA Home Loan Refinance – A Great Option For Homeowners 

Refinancing your mortgage loan is a powerful way to save money, shorten your term, or pull cash out. Your loan type plays a huge role in what is possible for your refinance. If you have an FHA home loan, you can use a refinance to cut interest rates, possibly lower your mortgage insurance, and update your current term.

Be sure to do your research based on your specific situation to determine if you qualify for an FHA streamline refinance and if that product fits your needs. By studying the topic and educating yourself, you’re taking the first and most important step. 

Loan Officer Kevin O'Connor

About The Author

Loan Officer Kevin O'Connor has over 17 years of experience as a Mortgage Loan Originator and is a trusted resource for mortgage education and information. He's licensed by the state of California and the Nationwide Mortgage Licensing System. He has a top rating with the Better Business Bureau, Google, Yelp, and Zillow. You can contact him at 1-800-550-5538. CA DRE #01499872 / NMLS #247447