What Happens if You Have an FHA Loan & You Refinance?

As with traditional mortgages, you can refinance a Federal Housing Administration loan to lower your monthly payments, get a lower interest rate or reduce the term of your loan. However, you must meet requirements for an FHA refinance. Generally, you must be refinancing the loan to lower the amount of principal and interest you pay each month.

Streamline Program

If your existing mortgage is through an FHA-approved lender, applying for an FHA refinance loan can save you time and money. In many cases, you won’t need to get a home appraisal, and you may be able to close the loan in as little as 30 days. Beginning in June 2012, loans backed by FHA before 2009 qualify for lower refinance fees through the streamline program. If you meet the eligibility requirements and choose this refinance option, the upfront mortgage insurance premium you pay will be 0.01 percent of your total loan instead of the traditional 1.75 percent. The FHA has also reduced the annual percentage premium from 1.25 percent to 0.55 percent.

Streamline Details

An FHA streamline refinance loan allows you to complete the refinance process faster by reducing the amount of paperwork involved. Your mortgage must be current in order to qualify. In addition, FHA must already insure any amount of your home mortgage that you want to refinance through streamline refinancing. While a streamline refinance does not allow you to get extra cash, you can include money to pay closing costs in the refinance. However, you must have enough equity in your home to cover the added costs.

FHA Cash-Out Refinance

If you decide to refinance your mortgage after you’ve built equity in your home, you may choose the cash-out refinance loan option. The FHA cash-out refinance allows you to refinance your existing mortgage by taking out a new loan for more money than you currently owe. You may be able to refinance your mortgage for up to 85 percent of your home’s appraised value. Unless you have owned the home for at least six months, you cannot apply for an FHA cash-out refinance loan. In addition, the FHA allows this type of refinance loan only on homes that are owner occupied. Depending on the state in which you reside, credit and income standards for cash-out refinance loans may differ from those required for non cash-out refinancing programs.

Loan Requirements

As with mortgage refinance loans offered by other lenders, you must meet certain FHA guidelines to qualify for refinancing. Even for a refinance loan, you may have to get your property appraised. This is usually the case if the amount of the principal you are borrowing is more than your current mortgage balance or if you are including the closing costs to refinance your loan in the new loan. Although the credit and income requirements make it easier to qualify for an FHA home refinance loan than for a conventional loan, you must earn enough income to pay back the loan.

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