We all know that it is possible to refinance through FHA. What we’d like to know is if a cash-out refinance is allowed. Is it possible to turn a part of your equity into cash through FHA refinance?
There are two types of FHA Refinance: through (1) FHA Streamline Refinance, and through (2) FHA Cash-out Refinance. So, the answer is a definite yes.
FHA Streamline Refinance is HUD’s way to make refinancing quicker by waiving off certain documentation requirements. This program helps decrease the mortgage loan’s interest rate, but this does not allow a cash out. FHA Cash-out Refinance, on the other hand, allows the borrower to loan an amount that is bigger than his/her current mortgage balance. The excess would then be at his/her discretion.
How does an FHA Cash-Out Refinance work?
For example, You get a cash-out refinance of $80,000. Take from that your mortgage loan balance of $50,000 and the closing cost which would be around $2,000. So you’ll end up with $28,000 left as extra cash.
Since this is considered a riskier loan compared to FHA streamline refinance, lenders would require more documentation and the guidelines are little stricter. Also, you would need to make sure you have an equity that is big enough to qualify for the loan. Take note that delinquent borrowers are not eligible for this type of refinance.
What are its Uses?
This extra cash can be used on home improvements or to pay your car loan. It can also be used towards credit card debts or other payables. If you can’t think of anything to use it on, save it! You can also roll this money to make it grow. It is really up to you on how you use this fund, but it’s wiser to spend it on things that count.
How Much Do You Get?
For homes that are owned and occupied for at least 12 months, a new appraisal must be done first. It is assumed that in this span of time, the value of the property has increased and is higher than the original purchase price. The Loan-to-Value Ratio should not exceed the maximum 85 percent of its new appraised value.
For homeowners occupying the house for less than 12 months, they can get 85 percent of either the property’s selling price upon acquisition or the new appraised value (whichever of the two is lesser).
How Do You Qualify?
Here are the following requirements for an FHA Cash-out Refinance:
(1) The home must be the primary residence of the borrower.
(2) You must be current with your mortgage loan payments. You cannot have more than one late payment within the recent 12 months.
(3) The mortgage must be six months old or older.
(4) Debt-to-Income ratio requirements must be met. There are two DTI ratios required, the 29% (this is your “total monthly housing payment” versus your “gross monthly income”) and 41% (“total monthly housing payment + all monthly credit obligations” versus your “gross monthly income”).
(5) Although FHA does not require a minimum credit score, the lender may set its own requirements. Usually, the score must not be less than 620 in order to qualify.
(6) A new property appraisal must be done. This is where they will determine the maximum allowable amount for the cash-out loan.
(7) You would also need to provide standard documents to prove your income and assets.
Just like the FHA streamline refinance, the cash-out refinance program can be used to lower your interest rates, change your loan terms and move it to a fixed rate loan. And although this type of refinance has some extra steps, it will be worth all the trouble when your loan gets approved.