Can You Recast An FHA Loan?

You cannot recast an FHA loan, as government-backed loans such as FHA, USDA, and VA do not offer a recasting option. Recasting allows you to adjust your mortgage payment by making a lump sum payment toward your principal balance. While this option is available with many conventional loans, FHA loans sadly don’t allow recasting.

However, if you’re looking to manage your mortgage payments differently, there are other options you can try. At RenoFI, we want to help you understand all of your borrowing options. Here, we’ll cover different approaches that can help reduce your mortgage payments and offer advice on finding the best fit for your financial goals.

Why FHA Loans Do Not Allow Recasting

FHA loans don’t allow recasting because it’s not part of how these government-backed mortgages work. Recasting is something you usually see with conventional loans, where you can lower your monthly payments after paying a large chunk of your loan’s principal. But with FHA loans, there are different rules in place that don’t allow for this.

The main reason behind this is that FHA loans are meant to help more people afford housing, especially those with low to moderate incomes.

Because FHA loans can’t be recast, borrowers cannot lower their monthly payments by making a large payment toward the principal. This rule helps to maintain the integrity of the FHA loan program, which is to make sure that housing remains affordable for those who need it most.

Which Loan Types Allow Recasting?

While mortgage recasting is a solid alternative to refinancing, it doesn’t change or reduce your current interest rate. However, your lender adjusts your monthly payments to reflect the new, lower balance. To qualify for recasting, your loan needs to fall into one of these categories:

1. Conventional Loan

Conventional loans aren’t insured by the government, so they have stricter requirements for credit scores and income. They’re best for people with good credit and a steady income.

2. High-Balance Loan

Conventional loans that exceed the conforming loan limits set by Fannie Mae and Freddie Mac are known as high-balance loans. They’re meant to help buyers in high-cost areas get financing without needing a jumbo loan.

3. Jumbo Mortgages

Loans that go beyond the limits set by the Federal Housing Finance Agency (FHFA) are considered jumbo mortgages. They aren’t backed by government agencies, such as Fannie Mae or Freddie Mac, and are typically used to finance high-end homes or properties in competitive real estate markets. Because they’re riskier for lenders, jumbo loans usually come with higher interest rates and stricter requirements — think higher credit scores, lower debt-to-income (DTI) ratios, and bigger down payments.

Can You Refinance Your FHA Loan?

While you can’t recast an FHA loan, you definitely can refinance it. Although many people who refinance their FHA loans are mainly looking to reduce their interest rates, you can get other benefits from refinancing. For one, it can help you fund a big project, such as renovating your home. You can also use refinancing to switch to a shorter mortgage term.

Lowering Your Interest Rate

Lowering your mortgage rate can reduce your monthly payments and save you money on the total interest you pay over the life of the loan. But remember, refinancing won’t save you money instantly. You’ll start seeing those savings only after you’ve covered the upfront costs of refinancing. In other words, you’ll start saving when you’ve reached the break-even point where your savings from refinancing equals what you spent on the process.

Closing Costs and Fees

Refinancing an FHA loan usually comes with significant closing costs, which could include fees for an appraisal. Plus, when you refinance, you’ll need to pay a new mortgage insurance premium (MIP). This is typically 1.75% of the refinanced loan amount, and you’ll have to pay it upfront. However, if your original FHA mortgage is less than three years old, you may get a partial refund of this premium at closing that helps offset the cost.

What’s the Difference Between Mortgage Recasting and Refinancing?

When you recast your mortgage, you’re basically making a large payment toward your principal balance. With mortgage recasting, your lender re-adjusts your monthly payments based on the lower amount you still owe. While this means you’ll end up with smaller monthly payments, the length of your loan stays the same. Also, recasting doesn’t reduce your loan’s interest rate.

On the flip side, refinancing means getting a completely new mortgage. Maybe interest rates have dropped a lot since you got your original mortgage, or you want to change from a variable interest rate to a fixed one. 

That’s where refinancing comes in; it replaces your old mortgage with an entirely new one. This means you’ll go through the process of applying for and getting a new loan again and then using that new loan to pay off your old one. The great thing about refinancing is that it gives you a chance to get better terms, such as a different repayment schedule or a lower interest rate.

In summary, here are the main differences:

• Purpose: Recasting involves paying down a big chunk of your loan to reduce your monthly payments. Refinancing is more about getting better terms on your mortgage.
• Impact on Interest Rate: Recasting usually doesn’t change your interest rate, while refinancing may give you a better rate.
• Costs: Because it involves less paperwork and fewer fees, recasting is cheaper. On the other hand, refinancing can be more expensive due to closing costs and other fees that typically come with taking out a new loan.

When Is It a Good Idea to Refinance an FHA Loan?

Aside from reducing your current interest rates or shortening the loan term, refinancing your FHA loan might make sense if you want to achieve specific financial goals, such as:

Tapping Into Your Home’s Equity

If your home’s value has increased since you purchased it, you might be able to refinance and take out some of that equity as cash for home improvements, paying off or combining debts, or other expenses.

Improving Loan Terms

Refinancing could qualify you for better loan terms and lower costs if your credit score has improved significantly since you got your FHA loan.

Changing Loan Type

Refinancing allows you to switch from an FHA loan to a conventional loan if you now qualify for better terms. It also helps you reduce or eliminate the mortgage insurance premiums you pay on your FHA loan. To be eligible, though, you should have at least 20% equity in your home.

Refinancing Options for FHA Loans

FHA Cash-Out Refinance

If you have a significant amount of equity in your home, an FHA cash-out refinance can help you tap into that value. This type of refinance replaces your current mortgage with a new, larger FHA loan. The difference between the two loan amounts becomes the cash you can use for whatever you need.

But that’s not all. You’ll get a new interest rate on your mortgage. If interest rates have dropped since you bought your home, a cash-out refinance can help offset the higher monthly payments from taking a bigger loan.

FHA 203(k) Refinance

An FHA 203(k) refinance can help you get the money you need to renovate or repair your home while also refinancing your mortgage. This type of loan allows you to combine the costs of your home improvements into your new mortgage, so it becomes easier to manage your finances.

You have two options when considering an FHA 203(k) refinance: standard and limited. A standard 203(k) refinance might suit you best if you plan to execute bigger projects that cost at least $5,000. You’ll need to work with a 203(k) consultant to make sure the work is done correctly.

On the other hand, a limited 203(k) refinance may be a better option for you if you’re looking to complete smaller, non-structural repairs that cost no more than $35,000. You won’t need a consultant for this option, but you’ll be limited in the types of repairs you can make.

No matter the type of 203(k) refinance you choose, your home improvement needs to meet FHA eligibility requirements to qualify.

FHA Streamline Refinance

If you have an FHA loan, you might be able to refinance it more easily with an FHA streamline refinance. This process is designed to make it simpler and faster to refinance your mortgage without needing a new appraisal. There are two types of streamline refinance: non-credit qualifying and credit-qualifying.

A non-credit qualifying streamline refinance is the most straightforward option. The lender won’t check your credit score or DTI ratio, so the process is a lot quicker and easier. However, if you choose a credit-qualifying streamline refinance, the lender will look at your financial situation and ability to pay your mortgage again. This might give you a better interest rate, but it requires more paperwork and a more detailed review of your financial situation.

Consider Your Goals Before Choosing an FHA Refinance Option

When you’re planning to stay in your home for the long haul, your financial needs are different compared to if you were thinking about selling in a few years. If you’re looking to make improvements to your home so it’s more sellable in the future, you might want to look into FHA rehab loans instead of doing a cash-out refinance. Alternatively, you could consider refinancing with the FHA Energy Efficient Mortgage package. This option lets you add funds for approved home upgrades.

If you’re like most people who already have an FHA mortgage and you’re thinking about refinancing, you’re probably comparing your current mortgage payment to what you could be paying with a new loan. 

An FHA simple refinance loan might be a suitable option if your main goal is to lower your monthly payment. And if you don’t already have an FHA loan but are considering one, the rate and term refinance loan option for non-FHA mortgages might be suitable.

Opting for FHA Loan Modification

The FHA Home Affordable Modification Program (HAMP) is another way to help you better manage your mortgage payment, especially if you’re struggling to keep up with monthly payments. Basically, the program alters the terms of your existing loan to make the payments more affordable. Loan modification can give you the following benefits:

• Reduced Interest Rates: Your lender may agree to lower the interest rate on your loan so your monthly payments are reduced significantly.
• Extended Loan Term: With a loan modification, you can extend the term of your loan. This way, the payments are spread out over a longer period, so you’ll end up making smaller monthly payments.
• Principal Forbearance: In some cases, your lender might let you defer part of the principal balance. This can cut down your monthly payment by up to 30%.

To qualify for the FHA HAMP program, you’ll need to meet these criteria:

• You shouldn’t have qualified for any other mortgage assistance programs
• Your front-end DTI ratio needs to be at most 31%, and your back-end DTI ratio should be at most 55%
• You might need to complete a three-month trial payment plan, depending on whether you’re in default or at risk of default.

Things to Be Aware of When Modifying Your FHA Loan

While FHA loan modification might be a workable option for borrowers facing financial hardship, it’s super important to be aware of a few potential downsides.

It Can Impact Your Credit Score

Opting for a loan modification can negatively affect your credit score. That’s because, in most cases, lenders won’t agree to a loan modification until you’ve missed payments. And your credit gets worse if you miss payments after the modification.

You Need to Prove Financial Hardship

Lenders will only consider loan modification if you can show evidence that you’re currently faced with financial difficulties. This could be losing your job or going through a divorce.

Refinancing Wait Time

Some lenders require a waiting period before you can refinance after a loan modification. You’ll need to wait it out if this applies to your situation.

Choosing the Right Lender for Your FHA Loan Refinance

Can you recast an FHA loan? Unfortunately, no. Recasting isn’t an option for FHA loans, but refinancing is a good alternative. Refinancing lets you change up your mortgage terms and might get you a lower interest rate or a better payment plan.

Need help finding the right lender? RenoFi loans are the smartest way to finance a home renovation project. Unlike traditional loans, which are based on your current home value or require you to refinance your primary mortgage and give up your low rate, RenoFi loans are based on the After Renovation Value of your home. This allows you to borrow on average 11x more, get a low monthly payment, and keep your low rate on your first mortgage. 

Contact us today at RenoFi. We’ll be happy to guide you through the process and help you find a lender that suits your needs.