Homeowners with FHA loans might choose to refinance at some point to gain more favorable terms. A refinance can lower your monthly payment, reduce the term of your loan or even allow you to access some cash from the equity you have built in your home for bills or remodeling. Knowing how to refinance an FHA loan can be very beneficial.
What Are The Different FHA Loan Refinancing Options?
Homeowners who are looking to refinance their FHA loan can choose from a few different options depending on their goals, their payment status and the current value of their home. Outlined below are a few popular refinance options for FHA loans.
FHA Streamline Refinance Program
Many homeowners are hesitant to refinance because they are concerned about all the paperwork and time involved. An FHA Streamline Refinance, as the name implies, offers a quick and efficient process to save borrowers time and money. It is based on the assumption that borrowers who have already passed the FHA requirements for their original loan do not need to be vetted as closely the second time around. This type of refinance aims to lower your interest rate and monthly payment.
FHA To Conventional Loan
Some homeowners choose to refinance out of their FHA loan entirely and secure a conventional loan instead. The main reason for taking this approach is removing the upfront and yearly mortgage insurance requirement seen with FHA loans. Another benefit is the higher loan limits of this type of loan. This can be a more expensive type of refinance than refinancing into a new FHA mortgage, but it may make sense if current interest rates are lower than the rate you are paying, the value of your home has increased or you have significant equity in your home.
Borrowers refinancing to a conventional loan will generally need a credit score of 660 or greater, a debt-to-income ratio that is 43 percent or less and a loan-to-value ratio that is 80 percent or greater, although guidelines vary by lender.
FHA Cash-Out Refinance Option
An FHA Cash-Out refinance is a viable option for homeowners who would like to tap into their home equity for things like home improvements or to pay bills, and it is generally straightforward. The homeowner applies for a new FHA loan according to the current market value of their property. The new loan pays off the first mortgage, and the homeowner keeps the difference between the two amounts in cash.
This is a bit more complex than a Streamline refinance but is a good choice when cash is needed. For a cash-out refinance, at least 15 percent equity in the property is required.
FHA Reverse Mortgage
An FHA reverse mortgage is geared toward homeowners who are aged 62 and above. It enables them to convert the equity in their home to income or a credit line, and it is paid back when the homeowner stops occupying the property. There are no income or credit requirements, and the amount of the mortgage is based on the value of the home in a current appraisal or the FHA insurance limit.
How To Refinance Your FHA Loan
Below are the steps involved in refinancing your FHA loan using the popular FHA Streamline Refinance.
Ensure you qualify
First, you must ensure that you qualify for FHA Streamline. Homeowners should have an existing FHA-insured loan and be current on their payments. The existing FHA loan must be at least 210 days old. There also must be a net tangible benefit, such as making it easier for the borrower to make their monthly payments on time.
Call mortgage lenders in your area to inquire about the rates and fees for an FHA Streamline Refinance. Compare these rates and choose a lender with whom you feel comfortable. Make sure they are on the list of lenders approved by the Department of Housing and Urban Development.
Decide how to handle closing costs
The closing costs of the loan can be paid up front or rolled into monthly payments. If you decide to roll them into the payments, the lender is required to order a home appraisal to determine its current market value.
Complete the paperwork
This type of refinance might have less paperwork than your original loan, but you will still need to fill out and sign the Uniform Residential Loan Application, or 1003, supplied by your lender. You will be asked to disclose basic financial information such as yearly income, monthly debt obligations and length of employment.
Sign the closing documents
Once the above steps are complete, you will sign the closing documents that your lender provides to finalize the deal. This is also when the closing costs are due if you have chosen to pay them up front.
Will FHA Refinancing Affect My Credit?
HUD does not require a credit check for FHA streamline refinances, so it should not have an impact on your credit. If you are refinancing to a conventional loan, however, lenders will check your credit score and your credit history. This will result in a hard inquiry on your report, which could cause a slight drop in your credit score.
This is only temporary, however, and the benefits may outweigh the temporary drop. For example, as you pay off your new loan, you could see your credit score improve as a result of a strong payment history.
Reach Out To A Professional Mortgage Brokerage
If you are looking to refinance an FHA loan, get in touch with the professional mortgage brokerage at My Lending Pal today to review your options and find the ideal refinance for you.