If you bought your home with a Federal Housing Administration loan as many first-time buyers and borrowers of modest incomes do, you may be ready to improve your loan. Better credit, increased equity or better interest rates can help you refinance into a new FHA-insured loan that has a lower payment or other more favorable terms. The FHA offers a rate and term refinance, known as a no-cash-out loan and a streamline refinance. In a refinance, you pay off the existing loan and transaction closing costs with proceeds from a new FHA loan.
Find an FHA-approved lender by contacting your current lender or servicing company and checking the FHA's database of approved companies. Contact at least two lenders to compare their interest rates, customer service and closing-cost estimates. Lenders approved to work with the FHA include banks, credit unions, mortgage brokers and direct mortgage-lending companies.
Review your current FHA loan statement or closing documents to determine the type of loan you currently have and what aspects of the loan you want to improve. Areas of improvement for an FHA loan may include changing an adjustable-rate mortgage, or ARM, to a fixed rate loan or reducing the interest rate. The streamline refinance must provide a "net tangible benefit" of at least a 5 percent reduction of the principal and interest payment or changing an ARM to a fixed-rate loan.
Apply with the FHA lender you choose for either a streamline or no-cash-out refinance. A streamline refinance can be completed with minimal income and credit qualifying and no appraisal; however, you must either pay closing costs out of pocket or opt for an interest rate that yields enough of a lender credit to pay the costs. You can finance closing costs with a no-cash-out refinance, which requires full income and credit qualifying as well as an appraisal. It mainly benefits borrowers with enough equity to cover the costs.
- FHA refinances require borrowers to meet loan-to-value and debt-to-income requirements. The LTV compares the loan balance to the home's value as a percentage. The DTI expresses how much of your income is used to pay monthly debts. The FHA allows you to refinance with minimal equity in your home and up to 97.75 percent LTV. It allows a housing payment DTI to 31 percent and a total debt ratio up to 43 percent. Higher DTIs are acceptable with a good credit history, reserves or other compensating factors.
- You pay closing costs on an FHA refinance, much like the costs paid when you originally obtained the loan. Closing costs cover lender fees, or points, escrow and title services, as well as prorated charges for interest, mortgage insurance, taxes and homeowner's insurance.
- You can receive no more than $500 cash back at closing on a streamline or no- cash-out refinance and your payments must be current at the time of application.