There are two ways to refinance an FHA loan; the program you choose will determine the seasoning requirements by the FHA and the lender itself. You can choose between a cash-out FHA refinance and a streamline refinance. If you choose the streamlined route, you will have to wait until you have made 6 payments in order to refinance. If you choose the cash-out FHA refinance, you must wait 12 months after you obtain the original FHA loan in order to refinance.
Choosing the FHA Streamline
There are numerous benefits of choosing the FHA Streamline Refinancing, including the following:
- No income verification is necessary
- Your credit does not get pulled again
- You do not need an appraisal
- You can lower your interest rate
- You can get a refund of a portion of the upfront mortgage insurance you paid on the original loan
The FHA Streamline Refinance relies on the fact that you paid your mortgage payments on time. If you are refinancing right at the 6-month mark, your last 6 months’ worth of payments must be on time. If you have held the FHA mortgage for more than 6 months, you must not have more than one 30-day late housing payment in the last 12 months.
The FHA Streamline loan is most beneficial during the first 36 months that you hold an FHA loan as that is when you can receive the MIP refund. The amount you receive decreases with each passing month. The refund starts at 70% at the 7th month after you obtain the loan and ends at 10% at the 36th month.
Lender Overlays on the FHA Streamline
Every lender has the option to add their own overlays onto the FHA Streamline requirements. Because the FHA does not fund the loans, the lender has the opportunity to require certain things that the FHA does not. This does not mean that every lender requires this, but a few common overlays include:
- Pulling your credit to ensure that you are still financially responsible
- Checking the values of the homes in your area to determine that they did not drop dramatically
- Verifying your employment with or without verifying your income
It is a good idea to make sure that all aspects of your qualifying factors are in tip top shape before applying for the Streamline program to ensure that you will get approved.
Choosing the FHA Cash-Out Refinance
If you wish to take cash out of the equity of your home, you can do so with an FHA Cash-Out Refinance. Unlike the Streamline Refinance, this program will require that you fully verify all aspects of your loan application. The largest difference with this program is that you must have 12-months of seasoning before you can apply for it.
The other stark differences between the Cash Out and Streamline program include:
- The loan-to-value for a cash-out loan is 85%
- An appraisal is required to determine the value of the property
- Income must be verified
- Credit is pulled and evaluated to determine eligibility
Before you apply for an FHA refinance, determine the reason you wish to refinance in the first place. If it is in order to lower your rate, the Streamline Refinance program is usually the best bet as it allows you to minimally verify your qualifications for the loan with the exception of requiring that you have on-time housing payments.
The Streamline Refinance program requires that you strictly refinance to lower the rate, however. This means that you can only include the outstanding principal of your original FHA loan plus any upfront MIP you must pay.
If you need cash out for any reason, such as debt consolidation, home improvements, or just for an emergency fund, you must use the fully qualifying FHA refinance. With this program you are not restricted to just the outstanding balance and MIP – you can include any amount up to 85% of the value of the home.
The length of time you plan to stay in your home and the need for cash will help you determine the type of FHA refinance that is right for you. Having to wait 12 months for the cash out refinance enables you to build equity up in the house so that cash out refinance is possible in the first place, so the seasoning requirements do have value. As soon as you are eligible to refinance, you can get the ball rolling, helping you to either lower your payment or get the cash out that you need from your home investment.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.