How Soon Can a Person Refinance an FHA Loan?

Borrowers with a good payment history on an FHA loan get better refinance terms.

Borrowers with a good payment history on an FHA loan get better refinance terms.

The Federal Housing Administration makes refinancing a home loan easier for borrowers of modest means and minimal equity. FHA loans are widely used by first-time homeowners and those with credit challenges. The government insurance guarantees the lender repayment if the borrower defaults, making it possible for the lender to finance a riskier borrower. Lenders typically want to see that a borrower has made a certain number of payments on an FHA loan before refinancing it.

The Basics

A refinance pays off a previous loan debt with the proceeds of a new loan. An FHA borrower can refinance his insured loan with another FHA loan or a conventional, non-government-insured loan. The FHA streamline refinance, which is an expedited refinance program, is the only loan type which requires an FHA-to-FHA transaction. FHA refinance loans are funded by approved lending institutions, such as commercial banks and mortgage companies.

Streamline Process

A streamline refinance is available only if the borrower has made at least six payments on the original FHA loan. The streamline process can be completed with or without a credit or income review and without a new appraisal, according to the Mortgage Research Center. An FHA borrower who assumed his FHA loan less than six months before the refinance can qualify for a streamline refinance if he undergoes the credit qualifying process. A loan assumption allows another person to assume responsibility for a loan without having to qualify with his lender. The assumed FHA loan must have originated before Dec. 1, 1986, to qualify for a streamline refinance with less than six months of payments by the borrower.

No Cash-out

A refinance that involves no cash back to the borrower at closing and simply allows the borrower to get a different interest rate and repayment term is known as a rate-and-term refinance, or a no-cash-out refinance. The FHA does not have a requirement for the minimum number of payments needed before the loan can be refinanced. A loan may be refinanced if it was acquire less than 12 months before the refinance application. The lender used to refinance the FHA loan may have a minimum requirement for the number of payments made and the amount of equity needed in the home. In general, the more payments a person has made on a loan, the more equity she has and the easier it is to refinance.

Cash-out Refinance

A cash-out refinance allows the borrower to tap into his home's equity and receive cash back at closing. It is considered a riskier refinance for a lender because it involves financing a higher loan amount for the borrower. Qualifying for this loan program is more difficult than a no cash-out or streamline refinance. When refinancing a loan less than 12 months old into another FHA loan, the borrower needs at least a six-month payment history of on-time payments. If the loan is at least 12 months old, the borrower must show he has made all payments on time within the previous 12-month period. A non-FHA lender also typically wants to see at least a 12-month period of on-time payments.

About the Author

K.C. Hernandez has covered real estate topics since 2009. She is a licensed real estate salesperson in San Diego since 2004. Her articles have appeared in community newspapers but her work is mostly online. Hernandez has a Bachelor of Arts in English from UCLA and works as the real estate expert for Demand Media Studios.

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