How soon can I refinance an FHA mortgage after buying a home?

By Gina Pogol
Mortgage Credit Problems Columnist

Dear Gina, I bought a home with an FHA mortgage a few months ago. Rates have gone down since then and I'd like to refinance. Unfortunately, my credit score has also dropped. I have heard that I can get a bad credit mortgage refinance through FHA. Is that true? - Matt, Kansas

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Dear Matt,

You are probably thinking about the FHA Streamline program. Yes, if you meet eligibility guidelines, you can refinance to another FHA mortgage with no appraisal and no credit qualifying or employment verification. Because FHA is already on the hook if you default, there's no reason to put your application through underwriting again.

Your house, FHA's rules

If you want to refinance with bad credit, FHA mortgage lenders have a few rules for you.

  • You must have made at least six monthly payments on the loan you have now, and at least 210 days must have lapsed since you closed on your home purchase. That means you have a few weeks to go yet.
  • In addition, because you've had your FHA mortgage for less than one year, you can't have had any late mortgage payments (30 days or more past due). Hopefully, your bad credit did not involve your mortgage payments.
  • If you've racked up any mortgage late payments, you'll have to wait until you've owned the home for 12 months. You are allowed one 30-day late payment in the last 12 months, but none in the last 90 days.
  • There must be a "net tangible benefit" associated with your refinance.

Net tangible benefit explained

FHA only allows streamline refinances that leave homeowners in a better financial position. That's the purpose of this rule. Here are some examples of allowable refinances that pass the "net tangible benefit" test.

  • If refinancing from a fixed rate to a fixed rate or an ARM to an ARM, your P and I (principal and interest) payment must be reduced by at least 5 percent..
  • If refinancing from a fixed rate to an ARM, your new ARM rate must be at least 2 percent lower than your current loan's fixed rate.
  • If refinancing from an ARM to a fixed rate, your new fixed rate may not be more than 2 percent higher than the current rate of the ARM.
  • Hybrid ARMs are treated like fixed-rate loans if refinanced during the fixed-rate period and like ARMs if refinanced during their adjustable phase.
  • Refinancing to reduce the mortgage term, for example from 30 years to 15 years, is also considered beneficial and is allowed.

Watch out for closing costs

To do an FHA Streamline with no appraisal, you can't increase the loan amount. This means you probably won't be able to wrap your closing costs into the new loan, so you'll have to pay them put of pocket or take a higher mortgage rate.

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