The FHA Refinance Loan Maximum Mortgage Calculation

April 5, 2021

There are many myths people have about FHA home loans. One is the nature of the required FHA mortgage down payment or maximum financing available. Some assume there is a zero down payment option, but that is not true. The borrower is required to make a minimum down payment on all new purchase FHA mortgage loans (3.5%).

The maximum financing allowed is 96.5%. Some borrowers may have to make larger down payments depending on credit scores and credit history.

Loan-to-value percentages on FHA loans may vary depending on the type of transaction--for example, FHA refinancing. What is the maximum loan-to-value ratio for an FHA refinance loan?

FHA Refinance Loan Maximum LTVs

For no cash-out rate-and-term refinances, FHA loan rules say the maximum LTV is 97.5% for owner-occupied principal residences. That amount changes to 85 percent “for a Borrower who has occupied the subject Property as their Principal Residence for fewer than 12 months prior to the case number assignment date; or if owned less than 12 months, has not occupied the Property for that entire period of ownership”...

Cash-out refinance loans have an 85% loan-to-value ratio. Simple refinances have a maximum mortgage loan-to-value ratio of 97.75 percent for Principal Residences and 85 percent for HUD-approved Secondary Residences.

Streamline Refinances

For owner-occupied Principal Residences the “maximum Base Loan Amount” for Streamline Refinances is the lesser of the outstanding principal balance of the existing Mortgage as of the month prior to mortgage Disbursement; or the original principal balance of the existing Mortgage.

Mortgage Insurance Issues

FHA mortgages will typically require payment of the Up Front Mortgage Insurance Premium. However, the UFMIP is not included when calculating the maximum financing amount. If you exceed the maximum mortgage amount when financing the premium, you are not penalized.
Your lender may need to make additional calculations, depending on the situation--one example: if the applicant’s original loan was less than a year before the loan application, and is not already FHA-insured, the original sales price of the property must be considered in determining the maximum mortgage.

In some cases, the costs of repairs and rehabilitation “incurred after the purchase of the property” may be allowed as part of the original sales price in calculating the mortgage amount. 
The maximum mortgage amount will be based on the lesser of the total cost to acquire the property, which includes the original purchase price plus any documented costs incurred for rehabilitation, repairs, renovation, OR;

weatherization, closing costs, and reasonable discount points, OR current appraised value, OR “the total of all mortgage liens held against the subject property.”

Arriving at the maximum mortgage calculation on an FHA refinance loan can be a bit complex, but much depends on the circumstances of your loan application--that’s a good reason why all borrowers, whether making a new purchase or refinancing, should allow plenty of time in advance to prepare for the loan.
 
It never pays to be in a hurry when trying to purchase property--the more you know going into the process, the better prepared you will be.

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