How Long After FHA Loan Can You Refinance (And Why)?

Exact Answer: At least 6 months

An FHA loan, which stands for Federal Housing Administration loan, is essentially a mortgage that is issued by an FHA-approved lender, and insured by the Federal Housing Administration. These FHA-approved lenders can be FHA-approved banks and lending institutions that will decide whether the borrower is eligible for the loan.

These loans are better suited for the low-to-moderate income group, in order for them to own a property. In comparison with various conventional loans, FHA loans require a lower minimum down payment and credit scores as low as 500. It is compulsory for qualified borrowers to purchase mortgage insurance and premium payments are directed to FHA.

There are five types of FHA loans: Traditional mortgage, Home equity conversion mortgage, 203(k) mortgage program, Energy efficient mortgage program, and Section 245(a) loan.

A loan can be refinanced, meaning the borrower can receive a new loan from a different lender in order to pay off an already existing loan. Eventually, the new loan can be paid for, over time.

How Long After FHA Loan Can You Refinance?

Type of refinanceDuration
FHA streamline refinance210 days
FHA cash-out refinance6 months – 1 year
FHA simple refinance6 months
FHA 203(k) refinance6 months

Refinancing a loan can be extremely helpful as it enables the borrower to lower their monthly payments with a longer term, choose lower rates for interest, and acquire more equity in their property.

If the borrower chooses the FHA streamline refinance, then it’s mandatory that they must have had the loan for at least 210 days. In addition, the borrower is required to have paid the payments for the mortgage on time, for six months before the refinance. If the borrower opts for credit-qualifying refinance, they will be needing a credit score of 580. These are the only factors that exist in order to qualify for an FHA streamline refinance loan.

A borrower is only qualified for an FHA cash-out refinance if they have owned the property for at least a year, and made mortgage payments on time. For this type of refinancing, the borrower will need at least 20% equity and will have to go through extensive verification in order to be applicable. Cash-out refinancing enables the borrower to take out a loan that is greater than the existing one, thus paying off the original mortgage. The subtracted amount can be used by the borrower.

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If the borrower is opting for the FHA simple refinance, they must be having either a principal home or a HUD-approved secondary residence. In this refinance, the borrower can swap their existing FHA loans for new ones with ether adjustable or fixed interest rates. Moreover, the borrower can only choose this refinance if they’ve made on-time payments for 6 months prior.

Like other FHA refinance programs, the FHA 203(k) refinance requires 6 months of on-time payments from the borrower, before applying for the refinance. This type of refinance is most often considered by buyers with older homes that are awaiting repairs.

Why Does It Take That Long to Refinance After FHA Loan?

Refinancing is normally done to either reap the benefits of a lower rate of interest or receive a top-up for the existing mortgage. In addition, the borrower will be working with lower monthly payments and a shorter payment term. Financial institutions usually establish a six-month rule for refinancing because this duration gives them the guarantee that the borrower will not back out of the loan in between, providing security for the lender.

If the borrower does back out before six months are over, then the lending institutions will be at loss. If each and every borrower opts for refinancing right after receiving the loan, then this deficit will be amplified for the banks and other lending institutions.

Conclusion

It is important to note that an FHA loan is merely insured by the Federal Housing Administration, not issued by it. Most FHA-approved lenders will require at least a six-month seasoning period before the borrower is allowed to refinance. Refinancing can have several benefits for the borrower including lower interest rates and decreased monthly payments.

References

  1. https://loans.usnews.com/articles/can-you-refinance-an-fha-loan
  2. https://www.propertysecrets.org/index.php/2019/07/31/what-is-the-six-month-rule-and-why-do-we-have-it/
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