Loan Approval for FHA Cash-Out Refinances
August 17, 2024
Is the application and credit evaluation process for an FHA cash-out refinance loan different from that for a new purchase home loan?
If you are a potential borrower looking for clarity on how your creditworthiness is assessed when applying for a refinance loan, keep reading, we discuss some of the fundamental issues below.
How To Apply for FHA Cash-Out Refinancing
FHA cash-out refinance loans require a new credit check and appraisal, similar to the rules for an FHA new purchase loan.
The purpose of the new property valuation is to establish the current market value of your home. In a scenario with changing property values, an updated appraisal ensures you receive the most accurate value and the right size loan.
The appraisal is mandatory, and contesting the appraisal is not allowed unless there are deficiencies in the report or the work itself.
Does the home require repairs or enhancements as a result of the appraisal? You may find that an appraisal for refinance loans doesn’t include all the same procedures as a purchase appraisal, and the basic concern is whether you have enough equity in the home to justify the loan and how much the loan will be.
The home must be evaluated for purchase loans to ensure it meets minimum FHA standards and to determine its fair market value. The refinance process is similar but not necessarily identical.
FHA Cash-Out Refinance Loan Approval
Lender criteria may vary, but the cash-out refinance loan requires a repayment track record similar to your original home loan.
You must make a minimum amount of payments (ask your lender what’s acceptable at that financial institution) on your mortgage. You should have 12 months of on-time payments on all financial obligations before applying. These requirements are similar to purchase loans.
If you need an FHA cash-out refinance loan, be aware that the FHA loan regulations stipulate the following:
The lender must take a closer look at any cash-out refinance if there are “three or more late payments of greater than 30 Days; one or more late payments of 60 Days plus one or more 30-day late payments; or one payment greater than 90 Days late."
However, the FHA standard is not the sole factor in loan approval. Lender requirements may often be more stringent than those outlined in the FHA loan regulations.
Discuss your circumstances with your participating FHA lender to clarify the rules and credit standards that may apply beyond the FHA minimums.
Comparing FHA Mortgages and VA Loans
Not all government-backed mortgages are the same. Consider how the VA loan program compares to the FHA loan equivalent in terms of credit score requirements and related loan approval criteria:
Don’t expect the lender to be more lenient regarding credit qualifying terms with a cash-out refinance. Take the same credit preparation time with a refinance as you did with the original mortgage.
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If you are a potential borrower looking for clarity on how your creditworthiness is assessed when applying for a refinance loan, keep reading, we discuss some of the fundamental issues below.
How To Apply for FHA Cash-Out Refinancing
FHA cash-out refinance loans require a new credit check and appraisal, similar to the rules for an FHA new purchase loan.
The purpose of the new property valuation is to establish the current market value of your home. In a scenario with changing property values, an updated appraisal ensures you receive the most accurate value and the right size loan.
The appraisal is mandatory, and contesting the appraisal is not allowed unless there are deficiencies in the report or the work itself.
Does the home require repairs or enhancements as a result of the appraisal? You may find that an appraisal for refinance loans doesn’t include all the same procedures as a purchase appraisal, and the basic concern is whether you have enough equity in the home to justify the loan and how much the loan will be.
The home must be evaluated for purchase loans to ensure it meets minimum FHA standards and to determine its fair market value. The refinance process is similar but not necessarily identical.
FHA Cash-Out Refinance Loan Approval
Lender criteria may vary, but the cash-out refinance loan requires a repayment track record similar to your original home loan.
You must make a minimum amount of payments (ask your lender what’s acceptable at that financial institution) on your mortgage. You should have 12 months of on-time payments on all financial obligations before applying. These requirements are similar to purchase loans.
If you need an FHA cash-out refinance loan, be aware that the FHA loan regulations stipulate the following:
The lender must take a closer look at any cash-out refinance if there are “three or more late payments of greater than 30 Days; one or more late payments of 60 Days plus one or more 30-day late payments; or one payment greater than 90 Days late."
However, the FHA standard is not the sole factor in loan approval. Lender requirements may often be more stringent than those outlined in the FHA loan regulations.
Discuss your circumstances with your participating FHA lender to clarify the rules and credit standards that may apply beyond the FHA minimums.
Comparing FHA Mortgages and VA Loans
Not all government-backed mortgages are the same. Consider how the VA loan program compares to the FHA loan equivalent in terms of credit score requirements and related loan approval criteria:
- VA Mortgages have no VA-established FICO score minimums.
- Participating VA lenders have their own credit score benchmarks.
- VA cash-out refinance loans are typically offered in 15-year and 30-year options.
- VA loans have no mortgage insurance requirement.
- FHA loans have a minimum credit score of 580 or higher for the lowest 3.5% down payment.
- FHA lender standards may be higher than FHA minimums.
- FHA Mortgage insurance is required for 11 years or the loan's lifetime.
- FHA cash-out refinance loan funds can be used for any purpose.
Don’t expect the lender to be more lenient regarding credit qualifying terms with a cash-out refinance. Take the same credit preparation time with a refinance as you did with the original mortgage.
------------------------------
RELATED VIDEOS:
Learn How to Meet FHA Requirements
Understanding APR
Your Proof of Ownership Is the Property Title
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