When can I refinance an FHA loan? That is a common question, and one that is addressed in the FHA loan handbook, HUD 4000.1. There are rules that govern how and when you can refinance your home loan and those rules will vary depending on the type of refinance loan you seek.
Most FHA home loans, including refinance loans and even reverse mortgages, require occupancy as a condition of loan approval. In the case of FHA cash-out refi loans, that occupancy is required for at least one year prior to the new loan. From HUD 4000.1:
“Cash-out refinance transactions are only permitted on owner-occupied Principal Residences. The Property securing the cash-out refinance must have been owned and occupied by the Borrower as their Principal Residence for the 12 months prior to the date of case number assignment.”
Occupancy isn’t enough for cash out refinance loans-the borrower is required to make on-time mortgage payments, too. In the same way that it’s a very bad idea to come to a new purchase FHA loan with fewer than 12 months of on-time payments on all financial obligations, it’s a bad idea to do so when applying for cash out refinance loans, too.
From the FHA loan handbook, we learn that when processing FHA refi loans, the loan officer is charged with insuring that, “the Borrower has made all payments for all their Mortgages within the month due for the previous 12 months or since the Borrower obtained the Mortgages, whichever is less.”
HUD 4000.1 adds, “…the payments for all Mortgages secured by the subject Property must have been paid within the month due for the month prior to mortgage Disbursement.”
What about FHA refinance loans that do not feature cash out? According to HUD 4000.1, there are similar requirements for occupancy, but the amount of time required to make payments differs:
“For all mortgages on all properties with less than six months of Mortgage Payment history, the Borrower must have made all payments within the month due. For all mortgages on all properties with greater than six months history, the Borrower must have made all Mortgage Payments within the month due for the six months prior to case number assignment and have no more than one 30-Day late payment for the previous six months for all mortgages.”
Again, that’s for FHA refinance loans that feature no cash back to the borrower at loan closing time.
These rules do not apply to what are commonly known as “short refinances” where the borrower is in a “negative equity position”. We will cover those rules in another blog post.