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Looking For An FHA Refinance? Know Your 4 Options

Looking for a home refinance? You may encounter various FHA loan refinance options during your search. But what are these options exactly and how do they set themselves apart from conventional mortgage refinances? 

Whether you started with an FHA loan or are considering refinancing into one, there are choices for you. Let’s discuss the advantages and disadvantages of different FHA loan refinance options. 

What Is An FHA Loan?

An FHA loan is a mortgage backed by the Federal Housing Administration (FHA), providing distinct advantages over conventional loans. These loans are particularly accessible to borrowers with higher debt-to-income ratios and lower credit scores due to their relaxed qualification criteria. Furthermore, FHA mortgages often feature more forgiving down payment requirements compared to alternative loan options.

How Does An FHA Refinance Work?

Before delving into the various refinance options for FHA loans, let’s briefly discuss the mechanics of a mortgage refinance. Refinancing your mortgage involves replacing your current home loan with a new one, typically entailing revised loan terms. As a homeowner aiming to reduce your interest rate or monthly payments, modify your loan specifications, or access your home equity, you might contemplate a refinance.

FHA Loan Refinance Options

Explore four distinct types of FHA loan refinances below. If the advantages of an FHA loan interest you, assess your eligibility for the various FHA refinance options listed.

FHA Refinance

The FHA Simple Refinance stands as a practical choice for homeowners who initially bought their home with an FHA loan. True to its name, this uncomplicated refinance avenue presents homeowners with the chance to reduce either their interest rate or their monthly mortgage payment.

Moreover, the FHA Simple Refinance enables homeowners to transition from an adjustable-rate mortgage (ARM) to a fixed-rate loan, should they desire.

Refinance Requirements


To qualify for an FHA Refinance, specific criteria must be met. These include credit score thresholds and income limits. Typically, a minimum credit score of 580 is required for eligibility. Additionally, your payment history will be assessed, necessitating that all loan payments from the past 6 months are current. A home appraisal will then be conducted to evaluate any changes in your property’s value.


Pros Of An FHA Refinance

  • Opportunity for financing closing costs: By bundling your closing expenses into the total loan amount, the initial costs of refinancing become more affordable.
  • Opportunity to modify your interest rate: This could involve securing a reduced rate or transitioning from an ARM to a fixed-rate loan.
  • Option to exclude the co-borrower from the mortgage: If you bought your home with someone who’s no longer required to be on the loan, refinancing provides an opportunity to eliminate the co-borrower.

Cons Of An FHA Refinance

  • Borrowers are unable to withdraw funds: The FHA Simple Refinance option does not include a cash-out feature. If you aim to access home equity, this may not be the optimal choice.
  • Borrowers must undergo a home appraisal: An appraisal is necessary to assess your home’s value, which can consume time and resources, prolonging the refinancing procedure.

FHA Streamline Refinance

Similar to the FHA Refinance, the FHA Streamline Refinance is open to homeowners with current FHA loans aiming to reduce their interest rate and monthly payment. In contrast to the FHA Refinance, the Streamline Refinance could skip the need for an appraisal or detailed credit report, expediting the process.

Refinance Requirements

To be eligible for an FHA Streamline Refinance, you must currently hold an FHA loan without any overdue monthly mortgage payments. Additionally, you should not be within 210 days of your initial home loan’s closing date. Specifically, the following conditions must be met regarding your mortgage payments:

  • No payments have exceeded a 30-day delay in the past 6 months.
  • Ensure there has been no more than a single payment delayed by over 30 days in the last 12 months.
  • A minimum of six monthly payments must be made on your current mortgage.

FHA Streamline Refinances come with a requirement regarding net tangible benefit, which concerns the financial advantage a borrower gains from refinancing. This stipulates that the refinance must offer clear benefits to you as the borrower for FHA approval.

For instance, if you opt for a shorter loan term, the new interest rate must not surpass the rate of your current mortgage. Additionally, the increase in your monthly mortgage payment should not exceed $50 compared to your previous payment.

Pros Of An FHA Streamline Refinance

  • With relaxed mortgage lender requirements for refinancing, the streamlined process involves fewer detailed credit and income checks. Typically, the lender may presume that if you can manage your existing monthly payment, you should be capable of handling the new one.
  • No need for a home appraisal: Skipping the appraisal process enables you to complete your refinance swiftly.
  • For homeowners in a situation where their mortgage surpasses their home’s value, there’s a viable solution: Even if you find yourself in this scenario, there are still refinancing options available to explore.

Cons Of An FHA Streamline Refinance

  • Closing costs must be paid upfront for an FHA Streamline Refinance, unlike a Simple Refinance where you can add them to the loan amount. Generally ranging from 2% to 6% of the loan amount, these costs are essential to consider before proceeding with the refinancing process.
  • Restricted cash-out option: This refinancing alternative allows borrowers to withdraw a maximum of $500 from their home equity.
  • Borrowers are obligated to pay mortgage insurance premiums (MIPs). While FHA MIP is mandatory for all FHA loans, switching to a conventional loan could offer a path to escape MIP payments.

FHA Cash-Out Refinance

Considering converting your home equity into cash? An FHA cash-out refinance offers a compelling solution. This refinancing option enables homeowners to switch their current mortgage to a new one with a higher loan amount, receiving the surplus as a lump sum. 

Notably, unlike other FHA refinance choices, an FHA cash-out refinance remains accessible to homeowners with differing existing mortgage types. For instance, those with a conventional loan can leverage an FHA cash-out refi due to the more forgiving credit score requirements, facilitating qualification.

Refinance Requirements

To be eligible for this refinance option, you must meet the specified borrower criteria:

  • A credit score of at least 580 is required.
  • A Debt-to-Income ratio equal to or less than 43%
  • No overdue mortgage payments within the past 12 months.
  • Reside in your home for a minimum of 12 months.

Besides meeting the stipulated requirements, it’s crucial to consider the loan-to-value (LTV) ratio limits. These thresholds dictate the minimum amount of equity you must maintain in your home relative to its present value. For a cash-out refi, your LTV must not surpass 80% of your home’s value, necessitating you to uphold a minimum of 20% equity in your property.

Pros Of An FHA Cash-Out Refinance

  • Benefit from reduced monthly payments: Besides accessing home equity, a cash-out refinance could secure a more favorable interest rate, potentially decreasing your monthly mortgage payments.
  • A lump sum payment from a cash-out refinance is versatile, serving various purposes like home repairs, debt consolidation, and building emergency funds. The cash received can fund a wide range of projects.

Cons Of An FHA Cash-Out Refinance

  • Opting for a larger loan amount by tapping into your home equity translates to shouldering more debt. It’s crucial to evaluate the immediate and future implications of this choice to ascertain its suitability for your financial goals.
  • Mandatory MIP payments: When transitioning from a conventional loan to an FHA loan through an FHA cash-out refinance, keep in mind that you must pay a mortgage insurance premium.
  • Mandatory home appraisal: Unlike a Streamline Refinance, a cash-out refi necessitates a home appraisal to ascertain the exact value of the property.

FHA 203(k) Refinance

Referred to as a mortgage rehabilitation or renovation loan, an FHA 203(k) refinance enables homeowners to consolidate home improvement and renovation expenses into their mortgage. The two available choices include the limited 203(k) refinance and the standard 203(k) refinance.

  • 203(k) Limited Refinance: Borrow up to $35,000 for eligible home upgrades with no minimum expenditure. This FHA 203(k) variant is designed for straightforward surface repairs such as new flooring.
  • 203(k) Standard Refinance: The FHA 203(k) standard refinance imposes no price limitation but mandates a minimum expenditure of $5,000 on home projects by the homeowner. This option caters to significant home enhancements, including structural repairs.

Refinance Requirements

Just like a cash-out refinance, you don’t need to start with an FHA loan to benefit from an FHA 203(k) refinance. Homeowners with any loan type can use this option, but they must meet specific qualification criteria, including credit score and DTI minimums. An FHA 203(k) refinance will require a home appraisal. It’s essential to remember that the FHA has strict guidelines regarding the types of home improvements covered under this refinance option.

Pros Of An FHA 203(k) Refinance

  • Looser credit score criteria: FHA loans typically feature more lenient eligibility standards compared to other loan options, simplifying the borrowing process for individuals seeking timely financing solutions.
  • Lower interest rates compared to other home improvement loans: If you have significant home repairs and renovations on the horizon, financing them with an FHA 203(k) loan is likely to be more cost-effective in the long term than opting for alternative home improvement loans.

Cons Of An FHA 203(k) Refinance

  • The approval process for this type of refinancing tends to be lengthier compared to others. This is because of the specific criteria related to the financing of home improvement projects, which can lead to prolonged processing times and potential delays for borrowers.
  • Borrowers are unable to utilize this choice for investment properties; the FHA 203(k) refinance is exclusively meant for primary residences, setting it apart from certain other refinancing alternatives.
  • Borrowers may need to enlist a HUD consultant. Depending on the nature of the planned repairs, loan terms may mandate consultation with a Department of Housing and Urban Development (HUD) representative for approval.

FHA Refinance FAQs

Interested in delving deeper into FHA refinances? Join me as we uncover some common queries surrounding this subject.

When can I refinance an FHA loan?

The duration you must reside in a home before refinancing differs based on the type of home loan. For both an FHA Simple and FHA Streamline refinance, a residency period of 6 months is necessary to meet the criteria. However, an FHA cash-out refinance mandates a minimum occupancy period of 12 months in the residence.

Can I refinance a conventional loan into an FHA loan?

FHA and FHA Streamline refinances cater exclusively to homeowners holding existing FHA loans. On the other hand, both the FHA cash-out refinance and FHA 203(k) refinance options are open to homeowners with any loan type. Consequently, borrowers have the flexibility to refinance a conventional mortgage into an FHA loan.

Can I refinance an FHA loan into a conventional loan?

Refinancing an FHA loan into a conventional one is an option for homeowners aiming to steer clear of the mandatory mortgage insurance premium (MIP) tied to FHA loans. With a conventional loan, homeowners are subject to private mortgage insurance (PMI) until they achieve 20% equity in their home.

The Bottom Line

To make the most of the advantages of an FHA refinance, it’s important to explore the different options available. Consider your immediate and future objectives, weigh the pros and cons of each refinance program, and select the one that aligns best with your financial goals.

Are you considering an FHA refinance or exploring other refinancing possibilities? Take the first step today by initiating the approval process to determine your eligibility by calling Elevation Mortgage at 719.247.6622

Picture of Reed Letson

Reed Letson

Reed offers two decades of expertise as a mortgage broker, focusing on veterans and first-time home buyers. With a strong grasp of real estate and mortgage markets, he empowers clients with practical insights. Reed's passion is guiding clients to build wealth through real estate investments and financing solutions.

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