Does your kitchen cry out for a significant renovation? Your family is expanding; do you need a second bathroom? Would you also like to reduce the monthly interest rate on your mortgage loan? You might benefit from an FHA cash-out refinance, which could result in a lower interest rate and some extra money for home improvements or whatever else you’d like to use it for.
What Is A FHA Cash-Out Refinance?
A cash-out refinance allows homeowners to refinance their mortgage loan while also receiving a lump sum payment of cash at the end of the process. Owners accomplish this by refinancing into a loan that is greater than the amount owed on their current mortgage.
Assume you owe $150,000 on your current mortgage. You could refinance to a new $200,000 mortgage loan, paying $4,500 in closing costs. You’d then take a lump sum payment of $45,500, which is the difference between the $150,000 you owe and your new $200,000 mortgage, less your $4,500 in closing costs.
That money can be used for anything, including the construction of a master bedroom suite, the repayment of high-interest credit card debt, or the payment of a child’s college tuition.
The FHA cash-out refinance differs from a traditional cash-out refinance in that your new mortgage will be insured by the Federal Housing Administration. FHA mortgages are available to homeowners with low credit scores, and the loans have lower interest rates. On the negative side, you will be required to pay mortgage insurance for the next 11 years. Then you must decide whether the benefits of an FHA cash-out refinance outweigh the drawbacks.
The good news is that you don’t have to be paying off an FHA loan to apply for an FHA cash-out refinance. You can apply for an FHA cash-out refinance even if you are currently paying off a conventional mortgage loan that is not insured by any government agency, unlike an FHA Streamline refinance, which requires less paperwork.
The FHA Cash-Out Refinance Method
To qualify for an FHA cash-out refinance, you’ll need enough equity in your home, a high enough credit score, and a steady enough monthly income stream to comfortably cover your debts, including your new monthly mortgage payment.
When you’re ready to refinance, you’ll first apply with an FHA-approved mortgage lender. Fortunately, nearly all mortgage lenders follow this procedure. Only mortgages are insured by the FHA. Because the agency does not originate them, you will need to work with a private mortgage lender, such as a bank, credit union, or other financial institution.
Requirements for FHA Cash-Out Refinances
Credit Score
For all mortgages insured by the FHA, a credit score of 500 is required. Most private lenders, however, will have their own credit score requirements.
Loan-To-Value (LTV)
Your loan-to-value ratio, or LTV, is also an important consideration. This ratio calculates your home’s equity, which is the difference between what you owe on your mortgage and what your home is currently worth.
Length of Residence
To qualify for an FHA cash-out refinance, you must have lived in the home with the mortgage you are refinancing for at least 12 months.
What is the Maximum Amount of Cash You Can Get From an FHA Cash-Out Refinance?
The amount of cash you can get from a cash-out refinance is determined by the amount of equity you have in your home.
You must have 20% equity in your home to qualify for an FHA cash-out refinance. However, after your FHA cash-out refinance is completed, you must have at least 20% equity in your home, which limits the amount of cash you can take out. This means you won’t be able to refinance your loan into one that is infinitely larger than the one you have now.
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