Refinance Your Loan with the FHA Cash Out Refinance Program
If you'd like to reduce your rates and access the equity in your home, you should consider the FHA cash out-refinance program. Whether you have a conventional home loan or an FHA loan, you will be able to benefit from the simple terms and requirements of the FHA cash-out loan. Not only do you have the chance to get lower rates (and a lower monthly payment) but you will also get some extra cash to use at your discretion.
What is the FHA Cash-Out Refinance loan?
Like conventional cash-out loans, the Federal Housing Administration (FHA) cash-out loan leverages your home equity to fund a larger loan than what you currently owe on your original mortgage and pays you cash for the difference. The amount you can borrow is based on your loan to value ratio (LTV), which can't exceed 85% for you to qualify.
For example, lets say that your home is valued at $150,000 and you owe $75,000, then you may only refinance to the value of $127,500 ($150,000 x 85%). If you refinanced to the full amount you could get a cash out of $52,500 ($127,500 - $75,000) before subtracting closing costs.
Why you should consider the FHA Cash-Out loan
Unlike the FHA streamline refinance program which only allows borrowers to refinance FHA loans, the FHA cash-out loan lets you replace any existing home loan with an FHA secured loan. It doesn't matter what kind of loan, either. Whether it's a conventional loan, subprime, adjustable rate mortgage, ALT-A or any other loan type, you can refinance it with the FHA refinancing program.
The benefits are much greater than just getting cash out, too; the loan program is useful for reducing your interest rate and/or modify the loan terms to something more beneficial to your goals, like reducing a 30-year loan to a 15-year loan. You could also refinance in order to switch from an adjustable rate mortgage to a more easily manageable fixed rate loan.
The best part is that there are no restrictions on your use of the cash funds you receive. You could use that extra money for anything from buying a new car to paying off expensive debts like student loans.
FHA Cash Out Refinance Pros:
- You can refinance any loan type
- More flexibility with your credit history and more options for first-time home buyers
- You can turn your home equity into cash
- FHA loans are assumable, so whoever purchases the home from you can take over your loan at the refinanced rate
- Comparably lower rates than conventional cash-out loans
FHA Cash Out Refinance CONs:
- The FHA has loans limits for each county and that may affect what you can expect from an FHA loan
- FHA loans come with mortgage insurance costs, no matter the down payment amount
- You will need to fill out all necessary paperwork for the new FHA loan
- The FHA cash-out refinance program carries more strict eligibility requirements than the FHA Streamline refinance program
How to Qualify for the FHA Cash-Out Refinance Program
Qualifying for an FHA Cash-Out Refinance loan is not as hard as you may think. The official credit requirement from the FHA is 500+, but lenders are able to set their own credit requirements. Generally, credit scores between 600-660 are the standard. On top of that, homeowners must have a loan to value ratio of no more than 85%, and will need to get their home appraised in order to confirm its value. Beyond that, eligibility for the FHA cash-out refinance is for homeowners who fit the following criteria:
- Live in the home as a primary residence, you cannot use second homes or investment property
- Have owned the home for at least one year
- Had no late payments within the last year
- The debt attached to the house, i.e. principal, interest, taxes, homeowner's insurance, mortgage insurance, and homeowners association dues; should not exceed 29% of your gross income
- Debt-to-income ratio (DTI) should not be greater than 43%. This means that your total monthly debt obligations cannot be valued at more than 43% of your total monthly income
- It IS possible to qualify for the FHA cash out loan with a DTI as high as 50% depending on the lender's acceptance of certain "compensating factors" that reduces their risk. Such factors include larger down payments, higher credit scores, or purchasing an energy-efficient home.