Many American homeowners receive their first mortgage from the Federal Housing Administration. These loans attract first-time buyers because they make it easier to obtain financing thanks to low down payment requirements and more relaxed credit score assessments.
Although these loans can help people get on the property ladder, some of their provisions can start to take a financial toll over time. In particular, the premiums paid for mortgage insurance can drive some homeowners to refinance into a conventional mortgage in the future.
With an FHA loan, borrowers must pay two types of mortgage insurance: an upfront mortgage insurance premium that is a one-time fee, plus a monthly mortgage insurance payment that often lasts for the duration of the loan. These premiums can add as much as $500 to a monthly payment, something that many homeowners seek to eliminate when their financial position or the value of their home changes.
How Can I Refinance My FHA Loan?
An FHA loan can be refinanced to a conventional loan if certain requirements are met. It is also possible to refinance an FHA loan using the FHA Streamline program. The right choice depends on current interest rates, the home’s value and the borrower’s goals.
How Long Do I Have To Wait?
Many homeowners looking to refinance an FHA loan wonder how long they have to wait before doing so, though there is no single correct answer. It depends on several different variables, such as how long the borrower has owned the property in question and what type of FHA refinancing they are seeking.
Waiting Period For FHA To Conventional Refinancing
Conventional lenders generally require borrowers to have made at least six payments on their mortgage before applying for a conventional loan refinance. There are also other requirements to meet, such as a 680 credit score, a 36 percent total debt ratio, and on-time mortgage payments, among others.
Homeowners who are ready to move into a conventional loan to eliminate mortgage insurance must have at least 20 percent equity in the home. Those who have an LTV exceeding 80 percent will be required to pay private mortgage insurance, though they can request that it be cancelled once they owe less than 80 percent of their home’s value. The amortization schedule shows homeowners how quickly they will get to this point by making on-time payments; it is also possible to speed this up by making extra payments toward the principal. Appreciation in the value of the home can also build equity faster.
Waiting Period For FHA Streamline Program
The FHA Streamline Program is a good option for those who wish to refinance an FHA loan but cannot afford the closing costs or provide the required documents. The program offers homeowners a simpler and faster way to refinance that foregoes the need for detailed documentation and income verification. It can help lower monthly mortgage payments, even when the mortgage is underwater.
Borrowers must wait 210 days or have at least six months of on-time payments before they can apply for a Streamline refinance. They must also show a valid reason for refinancing using the Net Tangible Benefit. This can be a 5 percent reduction of the principal and interest of the mortgage payment as well as the annual mortgage insurance premium, or a refinance from an adjustable-rate mortgage to one with a fixed rate. It is also important to keep in mind that getting a cash out refinance is not possible with this program.
Although the mortgage insurance requirement will continue with the Streamline refinance, upfront mortgage insurance premiums are usually absorbed into the mortgage and do not need to be paid in cash.
When Should I Refinance My Loan?
Even if enough time has passed to refinance your loan, it is important to think carefully about whether or not it makes sense to proceed.
The biggest consideration is the cost of your refinance. It always costs money to get a loan unless you happen to negotiate a loan with no closing costs, in which case you will be charged a higher interest rate and may not end up saving much money.
Getting a refinance after just six months does not allow you a lot of time to build up equity in the property. One case where this might still be a good move is when interest rates experience a significant drop and you can get an FHA Streamline program refinance. This has fewer costs involved because it does not require income, asset and home value verification, and it is easier to get approved.
A formula that can help guide this decision is the break-even point. Take the total closing costs and divide them by your monthly savings to determine the number of months it would take to break even. As a general rule, experts suggest only refinancing if this number is 36 months (3 years) or less, which means it will take you three years to recoup the closing costs and start enjoying the savings of the newer loan.
Speak With A Professional Mortgage Brokerage Today
If you are looking for more information on refinancing an FHA loan, speak with the professional mortgage brokerage at My Lending Pal to learn about your options.