How to Refinance an FHA Loan
What refinancing an FHA loan means and when it makes sense
Refinancing an FHA loan means taking out a new FHA loan to pay off your existing one. You keep the same house and the same lender type (FHA-insured), but you get new terms — usually a lower interest rate, a different loan length, or both. The new loan pays off the old one completely, and you start making payments on the new mortgage instead.
Refinancing makes sense when interest rates have dropped since you took out your original loan, or when your financial situation has changed enough that a different loan structure would save you money. If rates have fallen 0.5% or more below your current rate, the savings often outweigh the costs of refinancing. If your credit score has improved significantly, you may also may have access to for better terms than you did originally.
Refinancing costs money upfront — typically 2% to 5% of your loan balance in fees, appraisals, and title work — so you need to calculate whether your monthly savings will cover those costs within a reasonable timeframe, usually three to five years.
Key Takeaways
- An FHA Streamline refinance requires minimal paperwork and no new appraisal, making it faster and cheaper than a standard refinance.
- A standard FHA refinance works like a new loan application: you need a current appraisal, income verification, and a credit check, but you can refinance into a conventional loan if your equity and credit allow it.
- Refinancing costs 2% to 5% of your loan balance, so calculate your break-even point before committing.
- You must have paid your current FHA loan on time for at least six months before you can refinance, and you cannot refinance into a smaller loan amount than you currently owe.
FHA Streamline refinance: the faster route
An FHA Streamline refinance is designed to be quick and cheap. It skips the appraisal, skips most income verification, and requires only basic paperwork. You do not need to prove your income or employment history the way you would on a new loan application. The lender pulls your credit report and verifies that you have been paying your current FHA loan on time, and that is usually enough.
Streamline refinances are available only if your current loan is already FHA-insured. You cannot use this route if you have a conventional loan or a loan from another program. The new loan must be for at least as much as you currently owe — you cannot refinance into a smaller amount — and you must have made at least six months of on-time payments on your current loan before you apply.
Because there is no appraisal, the lender bases the new loan amount on your current loan balance plus closing costs. This means you cannot tap into your home's equity through a Streamline refinance. The tradeoff is speed: Streamline refinances typically close in two to three weeks, compared to four to six weeks for a standard refinance.
Standard FHA refinance: when you need a full application
A standard FHA refinance works like a new loan application. You submit pay stubs, tax returns, and employment verification. The lender orders a new appraisal to determine your home's current value. Your credit is pulled and reviewed. You may be asked to explain any late payments, collections, or other negative marks on your credit report.
A standard refinance takes longer — usually four to six weeks — and costs more in appraisal and processing fees. But it gives you more flexibility. If your home has gained value since you bought it, the appraisal can unlock that equity, allowing you to refinance for more than you currently owe. If your credit has improved, a full application gives the lender a complete picture of your finances and may may have access to you for a better rate.
You might choose a standard refinance over a Streamline if you want to tap into home equity, if your income has changed significantly since your original loan, or if you want to refinance into a conventional loan (which requires a full application regardless of your current loan type).
Refinancing from FHA to a conventional loan
If your credit score has improved and you have built equity in your home, you may be able to refinance out of the FHA program into a conventional loan. Conventional loans do not require mortgage insurance if you have 20% equity, which can lower your monthly payment significantly. The catch is that conventional loans have stricter credit and income requirements than FHA loans do.
To refinance into a conventional loan, you need a full application process: appraisal, income verification, credit check, and employment history. Most lenders want a credit score of 620 or higher, though 680 or better usually gets you the best rates. You also need to show that your debt-to-income ratio — the percentage of your gross monthly income that goes to debt payments — is below 43%, and ideally below 36%.
The advantage is that once you have 20% equity, you stop paying mortgage insurance, which can save $100 to $300 per month depending on your loan size. The disadvantage is that the application is more involved and takes longer. If you do not have 20% equity yet, a conventional loan will still require mortgage insurance, which may not save you money compared to staying with FHA.
Costs and timeline for refinancing
Refinancing costs typically include an origination fee (0.5% to 1% of the loan amount), appraisal fee ($300 to $500 for a standard refinance; $0 for Streamline), title search and insurance ($200 to $400), and various processing and underwriting fees ($500 to $1,500 total). Some lenders allow you to roll these costs into the new loan balance rather than paying them upfront, but this means you pay interest on them over the life of the loan.
To determine whether refinancing makes financial sense, calculate your break-even point. Divide your total refinancing costs by your monthly payment savings. If you save $150 per month and refinancing costs $3,000, your break-even point is 20 months. If you plan to stay in the house for at least that long, refinancing is likely worth it.
A Streamline refinance typically closes in two to three weeks. A standard FHA refinance usually takes four to six weeks. A refinance into a conventional loan may take six to eight weeks because the underwriting is more thorough. During this time, you continue making payments on your current loan.
Requirements and restrictions for FHA refinancing
You must have owned the home for at least six months and made at least six on-time payments on your current FHA loan before you can refinance. If you have missed a payment or paid late in the past six months, you will not may have access to. If you have missed two or more payments in the past 12 months, you are ineligible.
Your new loan cannot be for less than what you currently owe. If you owe $180,000 and your home is now worth $200,000, you can refinance for $180,000 or more, but not for $170,000. This protects the FHA insurance fund by preventing borrowers from extracting equity and then defaulting.
You must still meet basic FHA requirements: the property must be your primary residence (not a rental or investment property), and it must pass an FHA property inspection if it is a standard refinance. If you have taken out a second mortgage or home equity line of credit since you bought the house, the lender will require that to be paid off as part of the refinance.
How to start the refinancing process
Contact your current lender first and ask whether you may have access to for a Streamline refinance. If you do, ask for a Streamline quote. If you do not, or if you want to compare rates, contact other lenders and ask for a standard refinance quote. You can shop with multiple lenders without penalty — all credit inquiries within a 45-day window count as a single inquiry on your credit report.
When you get quotes, compare the interest rate, the annual percentage rate (APR), and the total closing costs. The APR includes the interest rate plus fees, so it gives you a more complete picture of the true cost of the loan. Ask each lender for a Loan Estimate, which is a standardized form that shows the interest rate, monthly payment, and all closing costs side by side.
Once you choose a lender, you will submit an application (minimal for Streamline, full for standard) and the lender will order an appraisal if needed. You will receive a Closing Disclosure at least three business days before closing, which shows the final terms and costs. Review it carefully and ask questions about anything that does not match your Loan Estimate.
Frequently Asked Questions
Can I refinance if I owe more than my home is worth?
Yes, you can refinance an FHA loan even if you are underwater (owe more than the home is worth). FHA Streamline refinances do not require an appraisal, so the lender does not care about current value. Standard refinances do require an appraisal, but FHA will still insure the loan if you are underwater, as long as you meet all other requirements.
What happens to my FHA mortgage insurance when I refinance?
If you refinance into a new FHA loan, you pay a new mortgage insurance premium (MIP). The upfront MIP is typically 1.75% of the loan amount and is usually rolled into your loan balance. Your monthly MIP continues based on your loan-to-value ratio and loan term. If you refinance into a conventional loan and have 20% equity, you can avoid mortgage insurance entirely.
How long do I have to wait after buying my home to refinance?
You must own the home for at least six months and make at least six on-time payments on your current FHA loan. This means the earliest you can refinance is around six to seven months after closing on your original loan, depending on when your first payment is due.
Will refinancing hurt my credit score?
Refinancing will cause a small, temporary dip in your credit score because the lender pulls your credit report and you have a new loan inquiry. The dip is usually 5 to 10 points and recovers within a few months. The long-term benefit of a lower interest rate and lower monthly payment typically outweighs this temporary impact.
Can I refinance if I have a second mortgage?
You can refinance your FHA loan, but the lender will require that any second mortgage or home equity line of credit be paid off as part of the refinance. The new FHA loan must be in first position (meaning it has priority if the home is foreclosed). If your second mortgage balance is high, this may affect whether refinancing makes financial sense.