How to Refinance a Government-Backed Mortgage

Government-backed mortgages make it possible for countless people to purchase affordable homes. However, many people don’t realize that it’s possible to refinance FHA/VA/USDA loans. Take a closer look at how to refinance a government-backed mortgage.

What is refinancing a government-backed mortgage?

When you refinance a government-backed mortgage, you take out a new mortgage to replace your current one. These are some of the most common reasons for refinancing:

• Lowering your monthly payment
• Getting rid of mortgage insurance
• Taking a co-borrower off your loan

If you’re wondering how to refinance a government-backed mortgage, you should know that the process varies based on whether you want to refinance to a conventional mortgage or another government-backed loan.

How to refinance an FHA loan

If you want to refinance a Federal Housing Administration (FHA) loan as a conventional mortgage, you would need to apply for a conventional mortgage and then use it to pay off your existing loan. However, refinancing with another FHA loan is often simpler.

FHA streamline refinance

An FHA streamline refinance is a program designed to help borrowers change their loan terms to something more favorable to them. With this kind of refinance, you may be able to lower your interest rate, reduce your monthly payment, or otherwise change your loan terms. However, you must meet certain qualifications:

• You must have closed on your original loan at least 210 days ago
• You must not have had any payments 30+ days late in the past six months
• You must not have had more than one payment 30+ days late in the past 12 months
• The new loan must benefit you in some way

Notably, with an FHA streamline refinance, you can’t roll closing costs into the new loan. However, this option still comes with several benefits. You generally don’t have to provide proof of income or pass a credit check, and you typically don’t have to have your home appraised.

FHA cash-out refinance

If you want to borrow against the equity you have in your home, you might consider an FHA cash-out refinance. With this option, you can borrow up to 80% of your home’s value. You use this new, larger FHA loan to pay off your existing mortgage, and you keep the difference in cash.

You do need to meet certain requirements to qualify for an FHA cash-out refinance. You must have lived in your home for at least 12 months and have had a positive payment history during that time. Your credit score must also be at least 580.

Cash-out refinances can be useful if you have a plan for the funds. Many people use the money to pay off high-interest debt, renovate their homes, or fund their own higher education.

How to refinance a VA loan

For those looking to refinance FHA/VA/USDA loans, your options vary depending on the type of loan you have. If you want to refinance a Department of Veterans Affairs (VA) loan, you have two main options.

VA interest rate reduction refinance loan (IRRRL)

With an IRRRL, you can lower your VA loan’s interest rate for a (usually) lower fee than you paid for your original loan. To qualify, you must have made six on-time payments in a row, and at least 210 days must have passed since your first payment due date.

Much like an FHA streamline refinance, IRRRLs generally don’t require a credit check or home appraisal.

These loans can help you secure a lower-rate mortgage, but you can also use an IRRRL to convert an adjustable-rate mortgage into a fixed-rate one.

VA cash-out refinance

With a cash-out refinance, you may borrow up to 100% of the appraised value of your home. However, you’ll need to verify your income, pass a credit check, and have your home appraised beforehand.

It’s important to note that although VA rules let you borrow up to 100% of the value of your home, individual lenders may set lower limits.

How to refinance a USDA loan

If you’re looking at how to refinance a government-backed mortgage and you currently have a U.S. Department of Agriculture (USDA) loan, you should know that your refinancing options are fairly similar to those for FHA and VA loans.

USDA streamline-assist refinance

You may qualify for this option if refinancing would lower your monthly payments by at least $50. You need to have made all payments on time for the past 180 days, and you generally don’t have to verify income or pass a credit check.

USDA streamline refinance

This option requires a review of your credit and debt-to-income ratio, but it offers you more flexibility. With a standard streamline refinance, you can add or remove borrowers from the loan.

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