Should You Refinance Your FHA Loan?

Our goal is to give you the tools and the confidence you need to improve your finances. While we do receive compensation from our partner lenders, whom we will always identify, all opinions are ours. Credible Operations, Inc. NMLS # 1681276, is referred to herein as “credible”.

Refinancing your FHA loan can have many benefits. On the one hand, it could help you lower your interest rate or your monthly payment. Refinancing can also help you get rid of your mortgage loan insurance (PMI) premiums and save even more money in the long run.

Here’s what you need to know about refinancing an FHA loan:

Can You Refinance an FHA Loan?

Yes, you can refinance your FHA loan. In doing so, you have two options:

  1. Refinance it into a conventional loan
  2. Apply for FHA Streamline refinancing

Refinancing Options For Your FHA Loan

FHA and conventional mortgage refinancing come with their own benefits and eligibility requirements. As a general rule, refinancing a conventional loan will be accompanied by credit score, fairness and documentation standards, but it also has potentially more benefits for the right owner.

Refinance simplified by the FHA Conventional refinancing
Credit score No credit check required 620+
Equity No minimum 20% (if you want to avoid mortgage insurance or withdraw money)
Evaluation Not required sometimes
Documentation Proof of employment or a utility bill to prove the house is your primary residence Credit report, tax returns, pay stubs, W-2
Other
  • Must be up to date on mortgage payments
  • Must have made at least 6 months of payments on time
  • Typically need a debt-to-income ratio of 43% or less

Refinancing in conventional loan

The biggest advantage of choosing conventional refinancing over FHA is that you can avoid mortgage insurance altogether. FHA loans come with mortgage insurance premiums ranging from 11 years to the full term of the loan. With conventional loans, no insurance is required – as long as you own at least 20% of the house.

Terms & Conditions

Conventional loans have more stringent requirements than those of the FHA. This is what they look like:

  • A credit score of at least 620: This shows the lender that you are financially responsible and pay your bills on time.
  • At least 20% of own funds: If you want to avoid the cost of private mortgage insurance, you will need at least 20% of the equity in your home. The lender can order an appraisal to confirm this.
  • The ability to pay the closing costs of refinancing: Closing costs typically run 2% to 5% on refinance loans. Your lender will want to verify that you have the necessary cash to cover them.
  • Documents proving your solvency, in particular: Income tax returns, pay stubs, a credit report (the lender will order it) and W-2

Benefits

Refinancing in one conventional loan. Here are a few:

  • You can drastically reduce your interest rate. Since conventional loans require a higher credit score, you may get an even better interest rate. This means savings on your mortgage payment and during the term of the loan.
  • You can get rid of FHA mortgage insurance. As long as you have sufficient equity, you can take out your new conventional loan without mortgage insurance at all (initial or monthly).
  • You can withdraw money from your house. If you need cash to cover home improvements or any other expenses you may have to come, conventional refinancing allows you to do that.

If you think refinancing is the way to go, Credible makes it easy to find great rates. You can compare multiple lenders and see prequalified rates in as little as three minutes without leaving our platform.

Find out if refinancing is right for you
  • Real rates from several lenders – In 3 minutes, get real pre-qualified rates with no impact on your credit score.
  • Smart technology – We streamline the questions you need to answer and automate the document upload process.
  • End-to-end experience – Complete the entire creation process, from rate comparison to closing, all on Credible.

Find my Refi rate
Checking rates will not affect your credit

The inconvenients

However, conventional refinancing has drawbacks. These include:

  • They have more stringent requirements: These loans are more difficult to qualify than FHA loans, so you will need to have a good handle on your finances before you apply.
  • You may need to pay for private mortgage insurance: If you don’t have enough equity in your home, a PMI may be needed.

FHA Streamlining Refinance

The FHA Streamline refinance program is designed for FHA borrowers who wish to refinance into another FHA loan. This allows them to do so without additional credit or employment checks.

Terms & Conditions

The biggest requirement for an FHA streamlining refinance, you have an existing FHA loan.

Apart from that, you will need to have:

  • No overdue mortgage payments: You must be up to date on your payments by the date of your request.
  • Six months of on-time payments: You need an established payment history on time to be eligible.

Benefits

FHA Streamline refinances have few documentation requirements and can be processed quickly. Additional benefits include:

  • Lower your interest rate: Because these loans come with insurance from the Federal Housing Administration, lenders can offer lower interest rates.
  • Fewer requirements: You won’t need to produce a ton of documents or even do a credit check. For this reason, the process is generally much faster.
  • Easily change the type of loan: If you have a variable rate loan, you can easily switch to a fixed rate.

The inconvenients

FHA Streamlines are not perfect, however. There are several drawbacks, including:

  • FHA Mortgage Loan Insurance Premium: MIP is required on all FHA loans, both in advance and with your monthly payments.
  • No withdrawal: The FHA Streamline program does not allow borrowers to withdraw money when refinancing.

Should You Refinance Your FHA Loan?

To determine if an FHA Streamline or conventional refinancing is right for you, use the table below:

Best if you … Refinancing option
Have 20% equity in your home Conventional
You want to withdraw money Conventional
I don’t have much credit Streamline
You want to get rid of mortgage insurance Conventional
You cannot prove your employment or income Streamline

If you can lower your interest rate by at least 0.75%, refinancing your mortgage is probably a smart move. Use Credible to see what refinancing rate you pre-qualify at the moment.

About the Author

Aly J. Yale

Aly J. Yale is a mortgage and real estate authority and contributor to Credible. His work has appeared in Forbes, Fox Business, The Motley Fool, Bankrate, The Balance, etc.

Read more

About Madeline Dennis

Check Also

Buy now, pay later by replacing layaway programs at major retailers

The popular program is being replaced by “buy now, pay later” plans. Layaway was once …