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FHA Refinance

An FHA refinance is an ideal way to refinance an existing mortgage loan to get money out of your equity in your home.  Be aware that equity requirements relative to your home’s value vary depending various factors in order to qualify for an FHA Refinance.  And, you must also occupy the home as your principle residence.

There are two types of FHA Home Refinance options.

FHA Regular Refinance Loan

There are two types of FHA Regular Refinance Loans.  They are the FHA Cash Out Refinance Loan and the FHA Non-Cash Out Refinance Loan.  The FHA Non-Cash Out Refinance is not the same as a FHA Streamline Refinance.

When applying for FHA Regular “Cash-Out” Refinances, Note that the maximum loan-to-value and combined loan-to-value of any cash-out refinance may not exceed 85%.

The calculation is based either off the appraised value or the original sales price, depending on the length of time the borrower has owned the property.

FHA Cash Out Refinance Loan

The FHA Cash Out Refinance Loan is for home owners whose principle residence has either increased in value since they took out their original mortgage or for home owners who have paid down enough of their debt that they have enough equity to qualify for a FHA Refinance Loan.

  1. FHA Refinance loans are limited to a combined LTV (FHA insured first mortgage and any subordinated lien) of 85% of the appraised value, provided the borrower has owned the property for at least one year. Note that manufactured homes have other restrictions (Handbook 4155.1, section 3.A).
  2. When the property was purchased less than one year preceding the application date, the LTV/CLTV (85%) for the mortgage amount must be calculated using the lesser of the appraised value or the original sales price of the property.
  3. The property that is security for the refinanced mortgage may be a 1-4 unit property.
  4. The property must be owner-occupied. A Non-owner occupant co-borrower may not be added to the loan application in order to meet FHA credit underwriting guidelines for the loan application.
  5. Properties that are owned free and clear may be refinance as cash-out transactions.
  6. When attempting to refinance 3-4 unit properties, the property is required to pass the self-sufficiency test and have a minimum of 3 months of payment reserves after closing.
  7. Properties acquired by inheritances within the past 12 months are eligible for a cash-out refinance transaction provided the applicant owner(s) have been occupying the property as their primary residence since the inheritance. The lender must document the acquisition by the borrowers via inheritance.
  8. If you are attempting to refinance a manufactured home as a cash out refinance, please note that there are other restrictions that apply.  Please refer to the FHA Handbook 4155.1, section 3.A.

FHA Non-Cash Out Refinance Loan

Non-streamline, No Cash-Out Refinances require that the maximum mortgage loan amount be based on the lesser of “1.” and “2.” below.  Note that a third calculation is applicable if owned less than 12 months:

  1. The maximum LTV percentage is multiplied by the appraised value, exclusive of closing costs (please refer to Mortgagee Letter 2010-24).
  2. The sum of the existing first lien plus any purchase money second mortgage and/or any junior liens over 12 months old, closing costs, prepaid expenses, accrued late charges, escrow shortages, borrower paid repairs required by the appraisal, discount points, prepaid penalties charged on a conventional loan and FHA Title 1 loans as determined by the appropriate HOC subtract any refund of refund of upfront MIP.

    Note that the prepaid expenses may include per diem interest through the end of the month for the new loan, hazard/flood insurance premiums, mortgage insurance premiums and property tax deposits needed to establish the escrow account.  And, the existing first lien may include the interest charged by the servicing lender, when the payoff is not received by the first of the month, but may not include any delinquent interest.

  3. If the property was acquired less than one year before the loan application, and the existing loan is not an FHA loan, the original sales price, must be considered in calculating the maximum mortgage. Refer to Handbook 4155.1, section 3.B.
  4. There may not be more than $500 in incidental cash back to the borrower.
  5. If there is an existing subordinate lien refer to Handbook 4155.1, section 3.A, 3.B and ML 11-11.
  6. If you are attempting to refinance a manufactured home as a cash out refinance, please note that there are other restrictions that apply. Please refer to the FHA Reference Guidelines Handbook 4155.1, section 3.A.

FHA Streamline Refinance Loan

FHA Streamline Refinancing is called that because this type of refinance is specifically designed to make it easy to do one thing… reduce the interest rate on your mortgage.  Because it is so single purpose, it is possible to do the refinance without a lot of the red tape usually associated with getting a mortgage.

This dramatically eliminates the cost and paperwork associated with the refinance.  Plus, it can sometimes even be done without an appraisal.   Put it all together and it means that you can get the FHA Streamline Refinance accomplished quickly and with less cost than a full, FHA Cash Out Refinance Loan.

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