When to Choose an FHA Refinance Home Loan Over a Conventional Loan

If you are refinancing your home loan, choosing an FHA refinanced home loan over a conventional loan may be the better option. An FHA home loan is insured by the Federal Housing Administration (FHA). Since the FHA insures the loan, this reduces the lender's risk, so you can potentially get better terms with an FHA home loan than you would with a conventional home loan.

Typically, FHA home loans have more flexible income requirements and more forgiving credit standards. You will still have to prove you have enough income to make your monthly payments, but a lender may disqualify you for a conventional loan if you have a certain amount of other debt. An FHA home loan allows for a higher ratio of debt to income. FHA home loans also look at alternative credit histories - auto loans, child care, school tuition, or utilities - when evaluating your loan.

The FHA also has a special loan program for doctors, emergency personnel, or teachers living in officially designated communities. If you are in one of these professions, and plan to stay in your home for at least three years, check to see whether you live in a participating community.

Of course, you may have already used an FHA home loan to first purchase your home. If so, the FHA can offer you a "streamline refinance" home loan. If both your original home loan and your refinance home loan are FHA loans, the lenders and the FHA can cut down on the amount of paperwork and documentation they need, which can reduce the closing costs of your refinanced home loan.