Four ways to refinance with an FHA loan

By Michele Lerner
Mortgage Credit Problems Columnist

FHA loans, contrary to what some consumers believe, are open to all buyers and homeowners, not just first-timers. The government insurance that backs FHA loans allows lenders to reduce down payment and equity requirements and underwrite with more flexibility. If you have bad credit and want to refinance, an FHA loan might be a solution for you.

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FHA's official minimum credit score is 580 (500 with 10% down or home equity), but most lenders require a credit score of at least 620. The maximum loan-to-value on an FHA refinance is 97.75 percent. Typically, FHA borrowers are allowed maximum debt-to-income ratios of 43 percent. All FHA loans require mortgage insurance, which is added to your monthly payments. Make sure you compare the details of both an FHA loan and a conventional loan before choosing to refinance.

Four FHA refinance options

1. FHA Short Refinance. If your mortgage balance is higher than the value of your home, and you are current on your mortgage payments, your lender may be willing to approve an FHA Short Refinance. Your lender would be required to write down your principal balance to no more than 97.75 percent of your home's current value.

2. FHA Secure. If your current mortgage is not an FHA loan, you may be able to refinance into an FHA loan, even if delinquent on your home loan. You will need a satisfactory appraisal and to meet the credit and debt-to-income ratio standards for all FHA borrowers.

3. FHA to FHA Refinance. If you have an FHA loan now and you are up-to-date on your mortgage payments, you may qualify for a streamline refinance. The refinance must result in a lower monthly principal and interest payment and you cannot take out cash, but this refinance won't require an appraisal. 

4. FHA Cash-out Refinance. If you have equity in your home and have either an FHA loan or a conventional loan and are current on your mortgage payments, you may qualify for an FHA cash-out refinance. Depending on your qualifications, you will be limited to a maximum loan-to-value of 95 percent or 85 percent. 

While a cash-out refinance will allow you to pay off some other debt and improve your cash flow, you can also use a refinance to reduce your monthly housing payments. Your extra savings can be used to reduce other debt obligations.



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