FHA refinance rates

FHA refinance loans can be open to those with poor credit, including people with a FICO credit score as low as 500, depending on the type of transaction. “The biggest restriction for FHA loans is the maximum loan amount, which is calculated based upon median home prices,” says Heck.

If you’re looking to refinance, you’ll probably come across the FHA streamline refinance and rate-and-term refinancing, and will want to understand them before deciding what’s right for you. “FHA streamline is a form of a limited cash-out, which is the same as a rate-and-term refinance,” Heck explains.

If you’re eligible for these mortgage products, you may qualify for reduced income and credit documentation requirements, as well as reduced or waived appraisal requirements.

“You also may be able to reduce the monthly MIP (mortgage insurance premium) you pay,” Heck says. “This all leads to a quicker and easier streamlined process, which should reduce closing costs and headache that is typically associated with the mortgage qualification process.” It’s also important to note that for an FHA streamline refinance, the original loan must also have been an FHA loan.

Refinancing can temporarily hurt your credit score for a few reasons:

• Whenever a hard credit check takes place, it appears on your credit report. Each inquiry has the potential to drag your score down, but typically by no more than five points. To avoid having multiple inquiries affect your score, aim to do your rate shopping within a 45-day period. With the FICO score model, all checks within that time are treated as a single inquiry. Another way you can be proactive is to check your credit score for free ahead of contacting a mortgage lender. Then you can work to improve it, if needed, before your lender does the hard inquiry.
• Your credit score can also be affected if you’re making other purchases at the same time as you refinance. Let’s say you’re simultaneously looking to buy a car. Shopping for more than one loan at a time, and different types of loans, can bring your credit score down faster.
• You might also see an impact on your score during the process of refinancing itself. Be sure to keep up with your existing loan’s payments until it’s time to begin making payments on your new loan to avoid hurting your score.
• If you’re looking to do a cash-out refinance and increase your balance considerably, you could be adding to your debt, which can harm your score.
• You might also see a hit to your score because the length of your credit history changes when you refinance. That’s because you’re closing your current mortgage and getting a new one.

Read more about FHA credit score requirements

A simple or no cash-out FHA refinance is one where all proceeds of a new FHA loan go only toward paying off an existing FHA loan and the costs of the transaction. The borrower refinances only the principal balance or possibly less.

By contrast, in a cash-out FHA refinance, borrowers are taking advantage of their option to receive cash, as they’ve paid down a substantial portion of their mortgages. Keep in mind that lenders will require a higher credit score for a cash-out refi, at least 600 to 660 and maybe more. The maximum loan-to-value for an FHA cash-out loan is 80 percent of the current appraised value.

An FHA streamline refinance is just what it sounds like: a relatively easy path to replacing an existing FHA loan with another in order to reduce your interest rate and monthly payment. These loans involve reduced paperwork and simplified requirements. They allow you to skip credit checks, but you’ll need to have made your mortgage payment on time over the preceding 12 months. There’s no requirement for income verification or a recalculation of your debt-to-income ratio.

If you’ve proven you’re a good credit risk for your existing FHA loan, there’s no requirement for a new debt-to-income ratio calculation. Under the FHA streamline program, your new loan can't exceed the original amount borrowed. An appraisal might be required, depending on existing equity and the loan balance. If the property has appreciated sufficiently, it might make sense to seek a reappraisal if you want to qualify for a higher amount, perhaps to pay for improvements. But the maximum cash you can get is usually $500.