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I've got an FHA mortgage but poor credit. Can I refinance?

Q: I currently have an FHA loan at 6.5 percent. I'd like to refinance at a lower rate but my credit score is below 600. What can I do to find a better rate? My house is appraised at over $130,000 and I owe less than $80,000.

A: The good news is that you should be eligible for an FHA streamline refinance. HUD requires no credit check and no appraisal is required on the property being refinanced, and depending on how old your loan is, the lender may not even require income or employment verification.

Here is what says about the requirements for a streamline refinance (from the HUD Handbook, section 4155.1, Chapter 6, Section C "Requirements for Streamline Refinance"):

"Except for credit qualifying streamline refinances, FHA does not require a credit report. The lender, however, may require this as part of its credit policy. If a credit score is available, the lender must enter it into FHA Connection (FHAC). If more than one credit score is available, the lender must enter all available credit scores into FHAC."

There’s more:

"Effective with case numbers assigned on or after April 18, 2011, FHA no longer requires lenders to certify employment and income on streamline refinance transactions."

Please know that “streamline refinance” refers only to the amount of documentation and underwriting that the lender must perform, and does not mean that there are no costs involved in the transaction.

FHA streamline refinance requirements

 The basic requirements of a streamline refinance are:

  • The mortgage to be refinanced must already be FHA insured
  • The mortgage to be refinanced should be current (not delinquent)
  • The refinance must result in a lowering of the borrower's monthly principal and interest payments, or, under certain circumstances, the conversion of an adjustable rate mortgage (ARM) to a fixed-rate mortgage
  • No cash may be taken out on mortgages refinanced using the streamline refinance process.  Lenders may offer streamline refinances in several ways. Some lenders offer "no cost" refinances (no out-of-pocket expenses to the borrower) by charging a higher rate of interest on the new loan than if the borrower financed or paid the closing costs in cash. From this premium, the lender pays any closing costs that are incurred on the transaction.

FHA does not allow lenders to include closing costs in the new mortgage amount of a streamline refinance.

The FHA also has a "credit qualifying streamline refinance" but this is only triggered when the monthly payment would rise by 20 percent or more, when borrowers are deleted from the loan, the loan has been recently assumed by a borrower and other criteria.

Find an FHA lender here

You should contact your existing servicer to see if they can help you; if not, HUD provides a lookup tool for FHA lenders at http://www.hud.gov/ll/code/llslcrit.cfm.

Ask the expert
Keith Gumbinger
Keith Gumbinger
Mortgage Expert
Vice President, HSH.com
About Keith: Mortgage market observer and analyst with 35 years experience... (more)
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