What is an FHA cash out refinance?
An FHA cash out refinance is a government-sponsored home refinance program. It allows a homeowner to turn home equity into cash by taking out a larger loan than what they currently owe. The homeowner receives the difference in cash.
FHA is one of the most popular home-buying programs on the planet. But not everyone knows FHA also offers three refinance types
Of the three, the FHA cash out loan is the only option that allows cash back to the homeowner. The following are the most recent guidelines and updates.Verify your FHA cash out refinance eligibility (Sep 18th, 2018)
Why use an FHA cash out loan?
FHA loan guidelines are flexible, opening up the cash out option to more homeowners.
Conventional refinance loans offer cash out as well. But the homeowner must have higher credit scores and more equity in the home.
With an FHA cash out, you can pay off any loan type, plus take equity out of your home in the form of a check, or have it wired to an account of your choice. You can use those funds for any purpose:
- Home improvement projects
- Credit card consolidation
- Auto loan payoff
- Student loan refinancing
- Prepay college tuition
- Consolidate a first and second mortgage
- Pay off personal debts
There is almost no limit to what you can use the money for. Homeowners who want to reduce monthly payments, or just have a little extra cash in the bank, should examine this loan type.Verify your FHA cash out refinance eligibility (Sep 18th, 2018)
How do FHA cash out refinances work?
With a cash out refinance, you open a new FHA loan to replace an existing loan. Unlike the FHA streamline, you don’t have to refinance an existing FHA loan.
You could have a subprime, Alt-A, conventional, ARM, or another loan type, and replace it with new FHA financing.
In addition, you can turn your home equity into “spendable” cash. Many homeowners don’t know that FHA can be a cash-generating tool, but it can.
Here’s how it works:
|New FHA Loan (max 85% of value)||$170,000|
The maximum loan-to-value for an FHA cash out loan is 85%. So, you must have substantial equity to use it. This loan, then, is best for those with good equity in their homes, but don’t meet the credit score requirements for cash out conventional loans.
Conventional cash out vs FHA cash out: LTV and credit score
The primary disadvantage to an FHA cash out loan is the associated mortgage insurance.
FHA loans require an upfront and monthly mortgage insurance premium (MIP). These fees are as follows:
- 1.75% of the new loan amount upfront (wrapped into the loan amount)
- 0.80% of the loan amount yearly, paid in 12 installments with the mortgage payment
This is equal to $1,750 upfront and $67 monthly for each $100,000 borrowed.
In return for the extra fees, FHA provides more credit score flexibility and a higher maximum loan-to-value (LTV) than do conventional loans.
Conventional cash out refinances do not come with upfront or monthly mortgage insurance. Also, conventional cash out can be used for second homes and investment properties. FHA must be used on the home you live in.
|Conventional Cash Out||FHA Cash Out|
|Minimum credit score||620 (official), 640-680 (likely)||500 (official), 600-660 (likely)|
|Can replace any loan||Yes||Yes|
|Occupancy||Owner, 2nd home, rental||Owner-occupied only|
FHA cash out on homes owned less than one year
If the mortgage has been open for at least 12 months, the last year of mortgage payments must have been made on time.
If less than a year, the homeowner must have made at least six payments on their current mortgage.
For instance, you purchased your home in February. Your first payment is in April. You must make on-time April through September payments before being eligible for a cash out loan. That rule applies whether you have an FHA loan currently or not.
If you’ve owned your home less than twelve months, you might want to wait to apply. For properties owned less than one year, the maximum FHA mortgage is equal to the lesser of:
- The current appraised value
- The original purchase price
For instance, you purchased your home 11 months ago for $250,000. The home is now worth $275,000. The lender will use a value of $250,000 unless you apply after 12 months have passed since the purchase.
If you wait one year after purchase, the maximum new loan amount is 85% of the current appraisal value.
FHA cash out mortgage rates
FHA rates are low — even lower than conventional loan rates, in fact. According to loan software company Ellie Mae, FHA rates average about 10 to 15 basis points (.10 – .15%) below conventional rates.
This is due to FHA’s strong government backing. Lenders can issue these loans at lower risk.
However, consider FHA mortgage insurance, which raises the “effective” FHA rates as follows:
|FHA Cash Out||Conventional|
*Example rates only. May not be currently available
FHA cash out loans may come with higher rates than do standard FHA loans. Check around with various lenders to find the best rate.
FHA mortgage rates have been holding low. It’s a good time to consider locking an FHA cash out refi. Rates are lower than those for other debt, such as credit cards, some auto loans, personal loans, and more. A debt consolidation strategy could be the right move.
FHA cash out refinance guidelines
Below are current FHA cash out refinance guidelines including credit score requirements, LTV maximums, and more.
The official credit score minimum for all FHA loans is 500. However, a realistic minimum that lenders will actually allow is somewhere between 600 and 660 or higher.
In addition, you must have paid all mortgage payments on time for the previous 12 months, or at least six months if you’ve owned the home less than a year.
If you were late on a payment, verify it showed up on your credit report. Credit bureaus typically don’t report late payments until they are at least 30 days late.
As stated above, the maximum LTV for FHA cash out refinances is 85%, unless the property has been owned less than one year. In that case, the maximum new loan amount is the lesser of the new value or original purchase price.Verify your FHA cash out refinance eligibility (Sep 18th, 2018)
Income and DTI
Adequate income is required to make the monthly payments for the new loan.
Current FHA affordability is determined by debt-to-income (DTI) ratios. Simply, that’s the ratio between your income and monthly debt payments.
For instance, if you make $4,000 per month and have debt payments equal to $1,000 per month, your DTI is 25 percent. FHA loans require a DTI of no more than 43 percent, including your future home payment and all debt payments like credit cards, auto loans, and student loans.
However, FHA allows borrowers with significant “compensating factors,” such as high credit scores, larger down payments, or purchasing energy-efficient homes, to qualify with a DTI as high as 50 percent.
You may not add any borrower to the loan who does not live in the home. These are known as non-occupant co-borrowers, and are not allowed for cash-out loans.
Generally, you can’t add a second mortgage to the FHA cash out loan unless both loans add up to 85% of the home’s value or less. However, you may be able to keep an existing second mortgage and subordinate it under the new FHA loan. Subordinating involves receiving a document from the second mortgage lender stating its loan is in lower priority than the new FHA loan.
In most areas of the country, the maximum FHA loan limit is $294,515 for 2018. However, maximum loan amounts go up to $679,650 in places like Los Angeles, California, and New York, New York. Check our loan limits calculator.
Check your FHA loan eligibility
FHA loan rates are low, leading to more homeowner eligibility for this program. Lenders are loosening standards, and are eager for FHA cash out business. Homeowners can get competing quotes and go with the rate that works best for them.
Get an FHA loan quote now, which includes an eligibility check and comes with no obligation if you are not satisfied with your rate.Verify your FHA cash out refinance eligibility (Sep 18th, 2018)