If you are like thousands of other homeowners, you used FHA financing to buy your home. It makes sense to do so, especially if you had a lower credit score and only had a small down payment. What if you want to refinance the loan, though? Is there a waiting period to do so?
The answer is that it depends. What type of refinance are you going to do? For example, are you going to take out another FHA loan? Are you going to go conventional? The answers to these questions will help you determine how long you must wait.
The FHA Streamline Refinance
The most common way to refinance an FHA loan is with the FHA streamline program. As the name suggests, the process is streamlined. In other words, you only need to provide very little documentation in order to qualify for the loan.
The lender is supposed to use your original qualifying information to qualify you for the FHA streamline refinance. The only qualifications you must prove at this point are that you made your mortgage payments on time and that there is a benefit for the refinance.
The real issue, though, is that you must wait at least 210 days from the date of your original FHA loan or make 6 payments before you can use this program. If you do refinance right at the 210-day mark, you must have all of your FHA mortgage payments made on time in order to qualify. If you have had the loan for at least 12 months, you are allowed to have one 30-day late payment during that time, but it cannot be within the last 3 months.
The FHA streamline refinance is strictly a way for you to lower your interest rate and/or monthly payment. You cannot take cash out of the home’s equity with this program. It’s strictly meant to help you get a more affordable loan.
The FHA Cash Out Refinance
If you prefer to take cash out of the home’s equity, you will also be subjected to the six-month rule. You must be able to prove that you made your last six months payments on time.
But there’s a catch. If you refinance before you own the home for 12 months and take cash out of the home’s equity, you can only take out the lesser of:
- The home’s current value (if it decreased)
- The original purchase price of the home
If you wait until you own the home for at least 12 months, you can borrow up to 85% of the current appraised value.
Here’s an example:
Let’s say you bought a house for $175,000. Today, it’s worth $225,000, but you’ve only owned it for 10 months. If you refinance with the FHA cash-out refi now, you can only take out 85% of the $175,000. If you wait until you own the home for 12 months, you can borrow 85% of the $225,000.
Chances are that you would not even have enough equity in the home if you had to use the purchase price that soon, so it makes sense to wait.
In short, you should wait at least 12 months to refinance your FHA loan or even to refinance out of any other loan type into an FHA loan. You’ll have more options and get better interest rates because you will have a longer payment history to prove to the lender that you can afford the new loan.