How to Improve Your FHA Loan

by KC Hernandez

If you bought your home with a Federal Housing Administration loan as many first-time buyers and borrowers of modest incomes do, you may be ready to improve your loan. Better credit, increased equity or better interest rates can help you refinance into a new FHA-insured loan that has a lower payment or other more favorable terms. The FHA offers a rate and term refinance, known as a no-cash-out loan and a streamline refinance. In a refinance, you pay off the existing loan and transaction closing costs with proceeds from a new FHA loan.

Find an FHA-approved lender by contacting your current lender or servicing company and checking the FHA's database of approved companies. Contact at least two lenders to compare their interest rates, customer service and closing-cost estimates. Lenders approved to work with the FHA include banks, credit unions, mortgage brokers and direct mortgage-lending companies.

Review your current FHA loan statement or closing documents to determine the type of loan you currently have and what aspects of the loan you want to improve. Areas of improvement for an FHA loan may include changing an adjustable-rate mortgage, or ARM, to a fixed rate loan or reducing the interest rate. The streamline refinance must provide a "net tangible benefit" of at least a 5 percent reduction of the principal and interest payment or changing an ARM to a fixed-rate loan.

Apply with the FHA lender you choose for either a streamline or no-cash-out refinance. A streamline refinance can be completed with minimal income and credit qualifying and no appraisal; however, you must either pay closing costs out of pocket or opt for an interest rate that yields enough of a lender credit to pay the costs. You can finance closing costs with a no-cash-out refinance, which requires full income and credit qualifying as well as an appraisal. It mainly benefits borrowers with enough equity to cover the costs.

About the Author

K.C. Hernandez has covered real estate topics since 2009. She is a licensed real estate salesperson in San Diego since 2004. Her articles have appeared in community newspapers but her work is mostly online. Hernandez has a Bachelor of Arts in English from UCLA and works as the real estate expert for Demand Media Studios.