6 Types of FHA Refinances: Which Is Best for You?

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An FHA refinance replaces your existing mortgage with one with a lower rate, different loan term, and can even give you cash at closing. 

There are six types of FHA refinances, in fact, designed to meet various refinancing needs. Three of these refinance types are available to homeowners with any existing mortgage, while the other three options are reserved exclusively for current FHA borrowers.

1. Non-Credit Qualifying FHA Streamline Refinance

The most popular type, a non-credit qualifying FHA Streamline refinance is a low-doc option for current FHA borrowers. It allows you to adjust your interest rate or loan term without an appraisal, income verification, or detailed credit check.

Who Is It Best For?

Just about anyone with an FHA loan who can lower their interest rate and does not need cash as part of the refinance.

What Else You Need to Know

Streamline refinances must pass a net tangible benefit test to be approved. If you’re refinancing an existing fixed-rate mortgage into another fixed-rate loan, your new combined interest and mortgage insurance premium (MIP) rate must drop by at least 0.5%.

Borrowers can qualify for a Streamline refinance once they’ve had their mortgage for at least 210 days, made at least six monthly payments, and six months have passed since their first payment due date.

To be eligible for a non-credit qualifying Streamline refinance, you must have made all mortgage payments on time for the past six months. You cannot have more than one 30-day late payment in the six months preceding.

Are you trying to refinance the FHA loan on a home you no longer live in? The two Streamline refi options are the only ones that allow you to refinance an investment property.

Since you aren’t reverifying your income level and debts, you can only remove co-borrowers in the event of divorce, separation, or death. Even then, you must prove that you’ve made the mortgage payments by yourself for the most recent six months.

You can’t wrap closing costs into a Streamline refinance, although some mortgage companies may offer you lender credits to reduce out-of-pocket expenses.

2. Credit Qualifying FHA Streamline Refinance

The credit qualifying FHA Streamline refinance is another low-doc loan option for existing FHA borrowers who need to adjust their interest rate or mortgage term. You won’t need a property appraisal, but you will need to reverify your income and meet minimum borrower requirements.

Who Is It Best For?

Someone whose credit profile has greatly improved since taking out their FHA loan or who wants to remove a co-borrower during the Streamline refi process.

What Else You Need to Know

If your finances have improved since you originally took out your mortgage, a credit qualifying streamline refi could make you eligible for a better interest rate based on a higher credit score and lower debt level.

With both credit-qualifying and non-credit-qualifying FHA Streamline refinances, your new loan must provide a net tangible benefit over your current mortgage. For most borrowers, this means a combined interest and MIP rate of at least 0.5% less than they have now.

Credit-qualifying Streamline refinances essentially follow the same rules as non-credit qualifying, except that you may remove a co-borrower from the loan if you qualify on your own. 

3. FHA Simple Refinance

Current FHA borrowers can use the FHA Simple refinance to change their interest rate or adjust the terms of their mortgage. Unlike the Streamline refi programs, the FHA Simple refinance requires an appraisal and full income and credit qualifying just like any standard refinance.

Who Is It Best For?

Homeowners with an FHA loan currently who do not meet the net tangible benefit requirement for a streamline refi and want to roll closing costs into their loan. Also, those who may qualify for lower rates thanks to a substantial gain in home equity.

What Else You Need to Know

The FHA Simple refinance does not have a net tangible benefit requirement like the two Streamline programs. You may be eligible for a Simple refi, even if you don’t qualify for a Streamline loan.

As with most FHA refinance loans, you can’t have any late mortgage payments in the past six months and no more than one in the six months prior.

Since you are required to requalify based on your current income level, you can use a Simple refinance to remove a co-borrower from an FHA loan.

4. FHA Rate and Term Refinance

An FHA Rate and Term refinance is a standard home refi that allows borrowers with any type of mortgage to refinance and adjust their interest rate and loan length. Unlike the previous refi types mentioned, you do not have to have an FHA loan currently.

Who Is It Best For?

Homeowners who currently have a different type of loan, someone legally required to buy out a co-borrower’s equity, and FHA loan holders with a second mortgage they want to wrap into their refinance.

What Else You Need to Know

You don’t need to have an FHA loan to do a Rate and Term refinance. As long as you’ve occupied the home as your primary residence for the past 12 months (or since acquiring the property if you’ve owned it less), you can refinance up to 97.75% of the appraised value with a Rate and Term.

This is a good program for someone who needs to refinance but doesn’t have much equity or does not qualify for a conventional refi.

FHA guidelines allow borrowers to use the Rate and Term refinance program to buy out equity from a co-owner in the case of a divorce or other legally ordered settlement.

The FHA Rate and Term refinance requires that you have no late mortgage payments in the past six months and no more than one over the past year.

5. FHA Cash-Out Refinance

You can use an FHA cash-out refinance to withdraw a portion of your home’s equity as a lump sum of cash, regardless of your current mortgage type.

Who Is It Best For?

Borrowers who need to tap into their equity but aren’t eligible for a conventional cash-out or who meet conventional minimums yet still qualify for lower FHA cash-out rates.

What Else You Need to Know

An FHA Cash-Out refinance lets you borrow up to 80% of your home’s total appraised value. Your larger refinance loan is used to pay off your existing mortgage, and the difference between the two is returned to you, minus closing costs, as cash.

You can do a cash-out FHA refinance with any type of existing mortgage. You can also use it to get cash out of a property you own free and clear.

You can use the funds from your cash-out refinance however you want. Most borrowers choose to use the proceeds for home repairs and improvements. Still, other common uses include consolidating high-interest debt, paying for major life expenses such as a wedding or college tuition, or purchasing additional real estate.

The FHA cash-out refi program is popular among borrowers who have difficulty qualifying with conventional lenders or receiving high-rate quotes because of a relatively low credit score. Well-qualified borrowers, even those who currently have an FHA mortgage, would likely be better off going conventional since all FHA refinances require MIP.

To be eligible for an FHA cash-out refinance, you must have occupied the property as your primary residence for at least 12 months (except in some instances of inheritance) and have made no late mortgage payments during that period.

6. FHA 203(k) Rehab Refinance

The FHA 203(k) Rehab refinance is a unique renovation loan that allows you to refinance any existing mortgage and fund home improvements based on the property’s anticipated future value.

Who Is It Best For?

Homeowners who want to borrow funds to make improvements and renovations and those currently unable to meet the minimum property requirements for other FHA refi loans.

What Else You Need to Know

Like a cash-out refinance, the 203(k) Rehab program lets you use your property’s equity to pay for home improvements. You can use 203(k) funds for almost any renovation project, except for luxury upgrades like adding a swimming pool or gazebo.

However, unlike a cash-out refinance, a 203(k) Rehab loan doesn’t give you a lump sum of cash to spend on the repairs. Instead, you’ll need to have an established plan for the project, and all payments will be disbursed to your pre-approved contractor directly by the lender.

The amount of funding you can qualify for with an FHA 203(k) loan is a little different as well. Instead of relying on your property’s current value, an appraiser estimates what your home would be worth once the proposed repairs are complete.

With a 203(k) Rehab refinance, you can borrow up to 97.75% of the property’s After Improved Value. If your credit score is below 580, you may still be able to get a Rehab loan for up to 90% LTV.

FHA 203(k) mortgages are available to finance repairs from $5,000 and up. However, borrowers who only want to make minor non-structural improvements may be interested in the Limited 203(k) refinance program. With a Limited 203(k), you can finance up to $35,000 ($50,000 in some instances) of renovations.

Why Choose an FHA Refinance?

The FHA refinance program is designed to assist homeowners with refinancing when they may have trouble qualifying through other lending channels. But even if you do qualify for different types of loans, an FHA refinance could still be your best option.

Low-Doc FHA Streamline Refinances

An FHA Streamline refinance is one of the fastest and easiest “no-cash out” refinance options on the market. If you currently have an existing FHA loan, the refinancing process will be far more straightforward with a Streamline than through any other mortgage program.

Better Rates for Lower-Credit Borrowers

FHA requirements are lower than for conventional and most other government-backed mortgages. You can typically qualify with a credit score of 580 (as low as 500 in some instances) and a debt-to-income ratio of up to 50%.

However, some lower-credit borrowers who qualify for a conventional mortgage may still find FHA rates cheaper thanks to the program’s risk-lowering backing by the federal government. 

Potential for a UFMIP Refund

If you have an existing FHA loan and it’s been fewer than three years since you took out the mortgage, you could qualify for a partial upfront mortgage insurance premium (UFMIP) refund. This amount can help offset your new loan’s closing costs.

In most cases, this refund would be between 10% and 68% of your original UFMIP payment, with the refund shrinking the longer you’ve had your loan.

Which Type of FHA Refinance is Best for You?

The best type of FHA refinance loan will depend on your reasons for refinancing and whether you currently have an FHA-backed mortgage. 

For eligible borrowers, a Streamline refinance is one of the simplest ways to reduce monthly payments. If you want to use your equity for home improvements or other purposes, an FHA cash-out or 203(k) Rehab loan are both worth looking into. To determine which of the six FHA refinance programs is best for you, check out today’s refi rates and connect with an experienced FHA lender who can explain your personalized options.

Jonathan Davis - Author at Refi.com

Jonathan Davis

Jonathan Davis is a Florida-based writer with over a decade of experience helping consumers understand complex mortgage, real estate, and personal finance topics. Jonathan has previously worked in the real estate industry and holds a bachelor’s degree in finance from the University of Central Florida.