If you have an FHA loan and are in need of money, you may be eligible for an FHA cash out refinance. This loan enables you to take cash out of the equity of your home. This means that you will have a mortgage with a higher loan-to-value ratio and higher payment, but you will have more cash in your hand to do with as you see fit. Many people tap into their equity in order to make improvements on their home, pay for school, or consolidate debt. Generally, if you qualify for the loan, the reason for the cash out does not matter, but it can play a role in your approval in the end.
What are the Requirements?
As with any loan, there are certain requirements you must abide by in order to get a cash-out FHA refinance.
- Credit – There is no minimum score per se, for a cash out FHA loan; every lender has their own requirements, but in general anything under 640 is not typically approved. If you have compensating factors to make up for the lower credit score, you may be able to get approved, but be ready for scrutiny into your credit history.
- Late Payments – Your mortgage history is of utmost importance to the lender that is providing your cash out refinance. If you have more than one 30 day late in the last year, you will not be eligible for the cash out refinance.
- Residency – The home must be your primary home in order to get cash out of the equity.
- Debt Ratio – Typically, the FHA caps the front-end ratio at 29 percent and the back-end at 41 percent. Every lender has their own guidelines, however, and may allow higher ratios if there are other positive factors regarding your loan.
- Maximum LTV – The highest your loan-to-value ratio can go when you are taking cash out of the home is 85 percent.
The general rules that apply to a standard FHA loan will apply to the cash out loan. You will need to provide proof of your income, steady employment, and assets. In some cases, you may have to show a tangible benefit for the loan. Since the loan is cash out, you will not likely be lowering your rate or you repayment, but if the cash out can be shown as a tangible benefit, especially if it is paying off other debt, you can get around the need for it to be lowering your mortgage payment.
Understand the Fees of an FHA Loan
Before you decide to go ahead with the FHA cash out refinance, you should understand the fees that are involved. The FHA charges upfront mortgage insurance, which is 1.75% of the loan amount. If you already had an FHA loan for your original mortgage, you paid this fee already, but will need to pay it again. In addition, you will need to pay monthly insurance on your mortgage. This insurance will not go away until you refinance out of the FHA loan, so you should figure it into your payments to determine if taking cash out is worth it. The monthly mortgage insurance is 0.85% of the base loan amount, divided equally among 12 payments per year.
If you are ready to take cash out of your home, you can do it with an FHA loan if you qualify. If your home is worth enough that you can be under 85% LTV and still get the cash out that you need, it could be a good option. Of course, if the FHA fees are too high and you have good credit, a conventional cash out refinance might be the better option for you. Weigh the pros and cons to see what would work best for you!