FHA Cash-out Refinance Mortgages
Sometimes It Pays to Refinance
The FHA cash-out refinance option allows homeowners to pay off their existing mortgage, and create a larger home loan that provides them with extra cash. The amount of money that can be borrowed depends on the amount of equity that's been built up in the home's value. To be eligible for an FHA cash-out refinance, borrowers will need at least 20 percent equity in the property based on a new appraisal. Equity is the difference between the current value of a property and the amount owed on the mortgage.
In the following example, a borrower obtained an FHA loan of $275,000 to purchase a home. He makes his monthly payments as agreed. As of today, the value has increased to $350,000 with a balance of $250,000 owed on the mortgage. In this example, a loan of up to 80 percent of the appraised value of the home would be permissible ($350,000 x .80 = $280,000). When subtracting the amount that is still owed on the existing mortgage ($250,000) leaves a maximum “cash-out” amount of $30,000 (less closing costs).
FHA Cash-out Refinance Guidelines
- Credit Scores
According to FHA guidelines, applicants must have a minimum credit score of 580 to qualify for an FHA cash-out refinance. Most FHA insured lenders, however, set their own limits higher to include a minimum score of 600 - 620, since cash-out refinancing is more carefully approved than even a home purchase. Some companies require at least one credit score for all qualifying borrowers. Others require that you use the middle score if there are three applicable scores, or use the lower in case of two. The lowest credit score would be used for qualification purposes. Consult your licensed loan officer regarding the lending institution's credit requirements in such cases.
The FHA has guidelines regarding an applicant's debt-to-income ratio in order to keep people from entering into mortgage agreements that they cannot afford. Therefore, many borrowers choose to pay off certain debts to keep the ratio low. There are two different calculations to take into account:
Mortgage Payment Expense to Effective Income
This is calculated by dividing your total housing payment by your income. Add up the total mortgage payment (principal and interest, escrow payments for taxes, hazard insurance, mortgage insurance premium, homeowners' association dues, etc.). Take that amount and divide it by gross monthly income. The maximum ratio to qualify is 31 percent.
Total Fixed Payment to Effective Income
Add up the total mortgage payment (principal and interest, escrow payments for taxes, hazard insurance, mortgage insurance premium, homeowners' association dues, etc.) and all recurring monthly expenses and installment debt (car loans, personal loans, student loans, credit cards, etc.). Take that amount and divide it by gross monthly income. This gives you the total debt ratio that includes monthly credit obligations, which needs to be lower than 43 percent to qualify.
- Maximum Loan to Value
FHA cash-out refinance loans have a maximum loan-to-value of 80 percent of the home's current value. The LTV ratio is calculated by dividing the loan amount requested by the property value determined in the appraisal.
- Payment History Requirements
Documentation is required to prove that the borrower has made all the monthly payments for the previous 12 months, or since the borrower obtained the loan, whichever is less. Mortgaged properties must have a minimum of 6 months of payments made before you are able to apply for a refinance. If you own your home free and clear, it may be refinanced as a cash-out transaction.
FHA Refinance Options for Homeowners
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