What are FHA refinance loans? Plus, the best lenders to use

Federal Housing Administration (FHA) loans can be a great option for mortgage borrowers, especially in high-rate environments like today — the 30-year fixed mortgage rate averaged 7.03% on Sept. 24, per Freddie Mac's Primary Mortgage Market Survey.

These loans come at lower rates than conventional mortgages and borrowers with credit scores as low as 500 can apply. Additionally, those with an existing FHA loan or another type of mortgage can get the benefits of this loan by applying for one of five FHA refinancing options.

Below, CNBC Select outlines the types of FHA loan refinancing available, our top picks for lenders that offer these loans, who they are right for as well as the pros and cons.

There are four different types of FHA mortgages:

FHA streamline refinance

This type of FHA refinancing is only available to those with an existing FHA loan who can show that the new type will lower their rate, monthly payment or eliminate mortgage insurance. 

In order to apply, you must have made on-time payments for the six months prior and you must have closed on your loan more than 210 days ago. Unlike most refinancing, you typically don’t need an appraisal, credit check, employment check or income verification. That’s because the FHA has already approved the borrower for what they need to pay and the borrower has already shown they can reliably make their payments. 

However, you can’t use this loan as a cash-out refinance, so you should explore another type of loan, such as the FHA cash-out refinance loan. Unlike some other types of FHA refinancing, you can’t roll closing costs — which are typically 2% to 6% of the loan — into the loan, meaning you’ll have to pay up front.

FHA simple refinance

An FHA simple refinance is similar to a streamline in several ways: you must have an existing FHA loan, you can’t take cash out and you must have made on-time payments for the past six months and have had the loan for at least 210 days. 

The key difference is the underwriting structure and the purpose of this loan: An FHA simple refinance requires an appraisal, credit check and income verification. It also doesn’t require you to show proof that getting this loan will lower your rate or your monthly payment, unlike streamline loans. 

Plus, you can roll your closing costs into the loan itself, meaning you don’t need to pay up front. That said, your closing costs will be charged interest over the life of the loan. 

If your existing home loan isn't an FHA loan or you want to cash in on your home equity, this may be the option for you. With this type of financing, you’ll get a lump sum that will first pay off your existing mortgage, then the remaining amount in cash. 

FHA cash-out refinance loans are available to all homeowners, including those with VA loan, conventional loans and those without a mortgage. You must also have made six to 12 months of on-time payments over the past year, depending on how long you’ve owned the home. 

With this kind of loan, borrowers can take out up to 80% of their home’s value as long as they meet credit and income requirements. 

FHA 203(k) refinance 

An FHA 203(k) refinance loan is for those looking to draw from their home equity to improve their home via renovations. 

This type of mortgage is very similar to an FHA cash-out refinance — homeowners with non-FHA mortgages can apply and get cash out. 

However, unlike a cash-out refinance, those funds must be reserved for a home renovation of $5,000 or more and kept in an escrow account 

Not all lenders offer the full suite of FHA loan products. Here are some of our favorite lenders that offer the options above:

Rocket Mortgage 

If you’re looking for an excellent online user experience,  great customer service and many options, Rocket Mortgage is worth your consideration. It’s the largest FHA loan lender in the country and offers all four types of FHA loan refinancing options. 
Plus, it consistently ranks among the top lenders for customer satisfaction on J.D. Power’s origination and servicer surveys. 

Chase Bank 

If you prefer to borrow in person, consider Chase Bank. It also offers all four FHA products and has over 5,000 retail locations nationwide. Plus, it ranks high in customer satisfaction and provides a wide array of alternative refinancing options that may be right for you. 

Pennymac

Finally, Pennymac is a great option for someone looking to refinance into an FHA loan because of its lower rates. Pennymac boasts below-average rates and will give homebuyers $2,000 if they purchase and refinance their home with Pennymac over three years. 

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every mortgage review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of financial products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties and we pride ourselves on our journalistic standards and ethics.

Catch up on CNBC Select's in-depth coverage of credit cards, banking and money and follow us on TikTok, Facebook, Instagram and Twitter to stay up to date.