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Refinancing a Conventional Loan To An FHA Mortgage

August 12, 2022

FHA Home Loan Rules

Some borrowers want to know: is it possible to refinance out of a conventional mortgage using an FHA refinance loan? It’s a smart question to ask, especially if you are interested in moving out of an adjustable-rate mortgage and into the predictability of a fixed-rate loan.

FHA Refinance Loan Options

FHA loan rules do permit you to refinance a conventional mortgage using an FHA cash-out refinance loan. But that’s not your only option. The FHA loan handbook, HUD 4000.1, says your options for FHA refinancing include non-FHA to FHA transactions. What kinds of refinance loan options are available? In general:

  • Cash-out refinances to help you pull equity out of your home;
  • No cash-out refinances for both FHA and non-FHA-insured Mortgages. These loan options include Rate and Term refinance, and FHA Simple Refinance options.
  • In certain cases, the FHA has in the past allowed the refinances of non-FHA-insured Mortgages for qualified Borrowers in negative equity positions. This has been traditionally known as a short refinance.
  • FHA Refinances for rehabilitation or repair (Section 203(k))

FHA Refinance Loan Eligibility

FHA refinance loans require you to financially qualify to refinance a conventional mortgage loan with an FHA loan. FICO score requirements vary depending on the lender, and you’ll want to start working on your credit as early as possible . It is smart to treat a refi loan the way you treated your original mortgage. Give yourself plenty of time to prepare for the new loan.

That means you should review your credit reports and scores, establish a minimum of 12 months of on-time payments on all financial obligations, and avoid opening new lines of credit.

You will not be required to make a down payment on an FHA refinance loan, but the LTV varies depending on the type of refinancing you are applying for.

FHA Refinance Loans: Occupancy Required

FHA refinance loans require occupancy. And in certain cases, prior occupancy may be required as a condition for that type of mortgage. FHA loan rules for FHA cash-out refinance loans include this requirement according to HUD 4000.1:

“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.”

There are certain exceptions to this requirement based on circumstances. “In the case of inheritance, a Borrower is not required to occupy the Property for a minimum period of time before applying for a cash-out refinance, provided the Borrower has not treated the subject Property as an Investment Property at any point since inheritance of the Property.”

FHA loan rules in this section add that if an FHA borrower rents out the home after it has been inherited, HUD 4000.1 says, “…the Borrower is not eligible for a cash-out refinance until the Borrower has occupied the Property as a Principal Residence for at least 12 months.”

Payment History Counts

For FHA cash-out refinancing, the rules for refinancing include some requirements for your mortgage payment. If you missed a payment in the last 12 months before your application, you may not be happy with the results of your loan application. Why? HUD 4000.1 says:

“The Mortgagee must document 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.”

Speak to a loan officer to learn more about refinancing to an FHA mortgage based on your current needs and financial goals.

Joe Wallace - Staff Writer

By Joe Wallace

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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