Can I Refinance a Non-FHA Home Loan to an FHA Mortgage?

By Gina Pogol
Mortgage Credit Problems Columnist

Candace Asks: Dear Gina, I have a bad credit mortgage that I'd like to get out of but I don't think I can. I put 20% down when I bought my house but it's value has dropped so much that I have very little equity. Is it possible to refinance to an FHA home loan if your mortgage isn't with FHA?

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Gina Says:

Dear Candace,

It's possible to refinance a bad credit or sub-prime mortgage (or any conventional home loan, for that matter) if you follow a few rules.

  1. First, you have to meet FHA's credit underwriting requirements. This generally means that you must have put at least two years between you and a bankruptcy, and at least three years between you and any foreclosure. In addition, you must show that your bad credit is behind you and that you have been paying your bills on time every month--probably for at least a year.
  2. Second, unlike many Alt-A or bad credit mortgage lenders, FHA lenders require that you document sufficient income to qualify. A stable job history or at least two years of successful self-employment is required, and your debt-to-income ratios must be reasonable--in general, your total payments including housing should not exceed 43% of your gross income.
  3. Your can refinance up to 96.5% of your home's value as long as you don't take any cash out or roll your refinancing costs into your loan (this is a recent rule change). So you don't need a huge amount of home equity to accomplish an FHA refinance.
  4. Your new loan cannot exceed FHA's loan limits in your area. These are determined by local housing prices and range from $271,050 to $729,750.

FHA has one more requirement that you did not have to deal with when you bought your home. People who put 20% down, or work with bad credit mortgage lenders don't usually pay for mortgage insurance. However, FHA does require that everyone pay a mortgage insurance premium (MIP), regardless of how much they put down or how much equity they have.

The upfront MIP is 1.75% and is usually financed into the new loan amount. In most cases, FHA mortgages also require annual mortgage insurance (ranging between .5% and .55% and paid monthly) for at least 5 years or until you have paid the loan down to 78% of its original amount. The exception is with a 15-year loan if the loan amount is less than 90% of the current appraised value. Then there is no annual MIP requirement.

Good luck and thank you for writing!

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