FHA Cash-Out Refinancing Instead of a Renovation Refinance?
June 13, 2024
Different home loans are available for different needs. If you want to cash out the equity you have built in the home, the FHA cash-out refinance is the right loan for the job.
It may also be the right loan in certain cases where you want to do home improvements, but that project does not qualify for the improvements possible with an FHA rehab loan.
FHA Rehab Loan Options
With an FHA rehab loan, known as the FHA 203(k) rehab loan, you can buy or refinance a home needing improvement. This type of loan is possible, but the house must be brought into compliance with FHA minimum standards and local building code.
However, the 203(k) rehab loan has restrictions.
You can’t do your own labor unless you meet FHA and lender requirements (not being a licensed contractor may be an issue for some borrowers), you can’t install luxury items like a swimming pool or barbecue, and you can’t add work you and the lender don’t agree to.
FHA Cash-Out Refinance Options
When you apply for an FHA cash-out refinance loan, you can use the money from that transaction for any purpose agreeable to the lender (there are few restrictions, but it’s good to ask if you aren’t sure), which can include home improvement, renovations, upgrades, etc.
There are no limitations on using these funds to repair your property. These loans are also effective for home improvements (under the right conditions) because you can ask for an FHA Energy Efficient Mortgage add-on to the loan to pay for approved energy-saving home modifications.
Considerations
Lender fees and other closing costs will be an important factor in your decision to apply for a 203(k) rehab loan or an FHA cash-out refinance.
If you don’t need extensive work done, have cosmetic fixes to make, or are otherwise on a smaller scale for the renovation, it may be smart to ask the lender about the limited 203(k) rehab loan.
The limited FHA 203(k) is smaller than the standard version and, depending on borrower choices, potentially less of a financial obligation when the work is finished.
Despite closing costs and other variables, some borrowers will need the FHA cash-out refinance option because the loan funds can be used to upgrade the house without restriction.
In such cases, it pays to explain your goals and needs to several loan officers and ask them to present the best FHA loan options for you.
If out-of-pocket costs are a factor, be sure to mention that. If you don’t mind paying more out of pocket up front, the lender should know that, especially if you want to reduce the total cost of the refinance loan over the long term.
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RELATED VIDEOS:
Learn How to Meet FHA Requirements
Understanding APR
Your Proof of Ownership Is the Property Title
It may also be the right loan in certain cases where you want to do home improvements, but that project does not qualify for the improvements possible with an FHA rehab loan.
FHA Rehab Loan Options
With an FHA rehab loan, known as the FHA 203(k) rehab loan, you can buy or refinance a home needing improvement. This type of loan is possible, but the house must be brought into compliance with FHA minimum standards and local building code.
However, the 203(k) rehab loan has restrictions.
You can’t do your own labor unless you meet FHA and lender requirements (not being a licensed contractor may be an issue for some borrowers), you can’t install luxury items like a swimming pool or barbecue, and you can’t add work you and the lender don’t agree to.
FHA Cash-Out Refinance Options
When you apply for an FHA cash-out refinance loan, you can use the money from that transaction for any purpose agreeable to the lender (there are few restrictions, but it’s good to ask if you aren’t sure), which can include home improvement, renovations, upgrades, etc.
There are no limitations on using these funds to repair your property. These loans are also effective for home improvements (under the right conditions) because you can ask for an FHA Energy Efficient Mortgage add-on to the loan to pay for approved energy-saving home modifications.
Considerations
Lender fees and other closing costs will be an important factor in your decision to apply for a 203(k) rehab loan or an FHA cash-out refinance.
If you don’t need extensive work done, have cosmetic fixes to make, or are otherwise on a smaller scale for the renovation, it may be smart to ask the lender about the limited 203(k) rehab loan.
The limited FHA 203(k) is smaller than the standard version and, depending on borrower choices, potentially less of a financial obligation when the work is finished.
Despite closing costs and other variables, some borrowers will need the FHA cash-out refinance option because the loan funds can be used to upgrade the house without restriction.
In such cases, it pays to explain your goals and needs to several loan officers and ask them to present the best FHA loan options for you.
If out-of-pocket costs are a factor, be sure to mention that. If you don’t mind paying more out of pocket up front, the lender should know that, especially if you want to reduce the total cost of the refinance loan over the long term.
------------------------------
RELATED VIDEOS:
Learn How to Meet FHA Requirements
Understanding APR
Your Proof of Ownership Is the Property Title
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