If you have an FHA or VA loan and are considering refinancing to secure a lower interest rate or monthly payment, it’s important to understand the refinancing restrictions imposed by these government programs. These rules protect borrowers from repeated refinancing schemes that primarily benefit lenders, such as “loan churning,” which can erode home equity through repeated loan fees and costs.
Why Refinancing Restrictions Exist
Both the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) enforce refinancing restrictions to safeguard homeowners. These guardrails include seasoning periods, requiring a minimum time and payment history before refinancing, and net tangible benefit tests that ensure the new loan improves financial terms for the borrower.
Key FHA Refinancing Restrictions
The FHA Streamline Refinance is a popular option for FHA loan holders. The main rules include:
- Seasoning Period: Borrowers must have made at least six consecutive on-time payments, and 210 days must have passed since the original loan closed or the first payment was due.
- Net Tangible Benefit (NTB): The refinance must provide a measurable benefit, typically a reduction of at least 5% in combined principal, interest, and mortgage insurance payments, or moving from an adjustable-rate to a fixed-rate loan.
Key VA Refinancing Restrictions
VA loans, especially through the Interest Rate Reduction Refinance Loan (IRRRL), have similar but distinct requirements:
- Seasoning Period: At least six consecutive on-time payments and 210 days from the original loan’s first payment.
- Net Tangible Benefit: Usually requires a minimum interest rate reduction of 0.5% or switching from an adjustable-rate to a fixed-rate mortgage.
- Fee Recoupment Period: Unique to VA loans, lenders must ensure borrowers can recover all refinancing costs through monthly savings within 36 months, preventing refinancing that incurs high fees for minimal savings.
Comparing FHA and VA Restrictions
| Restriction | FHA Streamline Refi | VA IRRRL |
|---|---|---|
| Seasoning Period | 210 days + 6 on-time payments | 210 days + 6 on-time payments |
| Net Tangible Benefit | 5% payment reduction or ARM-to-fixed refinance | 0.5% interest rate reduction or ARM-to-fixed |
| Fee Recoupment | No specific requirement | Must recoup costs within 36 months |
| Cash-Out Loan-to-Value | Usually limited to 80% | Can go up to 100% for eligible veterans |
What If You Can’t Meet These Requirements?
Lenders must comply with these federal rules. If you don’t meet the seasoning or net benefit criteria, your refinance will be denied. These restrictions exist to protect your financial well-being and the equity you’ve built in your home.
Additional Considerations
Lenders may impose stricter standards, called lender overlays, such as higher credit score requirements. Also, cash-out refinances have additional criteria, including occupancy requirements and loan-to-value limits. Exceptions to seasoning periods are rare due to regulatory stability.
Learn More
For detailed FHA loan information, visit our FHA Loan Glossary. To understand VA loan specifics, see our VA Loan Glossary. For insights into VA loan streamlines, check VA IRRRL (Interest Rate Reduction Refinance Loan).
Authoritative Resources
- FHA Single Family Housing Policy Handbook (HUD.gov)
- VA Interest Rate Reduction Refinance Loan (IRRRL) (VA.gov)
Understanding these refinancing restrictions is crucial for FHA and VA loan holders seeking to refinance. Knowing the rules, benefits, and costs will help ensure that the refinance improves your financial position and protects your home equity.
