With the availability of FHA-insured loans, millions of families have been given the opportunity to purchase their own homes. Those with existing FHA loans have also been allowed to decrease their monthly payments and interest rates by refinancing their mortgages.
FHA Streamline Refinance vs. FHA Cash-out Refinance
The primary purpose of refinancing is to replace the first mortgage with a new one, ideally with better terms. It could be lower interest rates allowing lower monthly payments or a shorter loan term (from 30 years to 15 years) to pay off the mortgage sooner.
While some borrowers refinance with an FHA Streamline refinance to get lower mortgage payments, others opt to take out the difference through an FHA Cash-out Refinance. They have the liberty to choose how they want to use the cash they get out of the refinancing.
Borrowers are allowed to take out up to 85% of the current value of the mortgage from the refinancing. To better explain, let’s take, for example, a house you purchase for $100,000. After seven years and the market value increases to $150,000, you can use up to $127,500 to pay off the first mortgage and pocket the difference.
Also, FHA loans need to undergo another set of evaluations before being granted a cash-out refinance. There are rules each borrower has to follow and credit requirements he has to meet. Read on to learn more.
FHA Cash-out Refinance Borrower Requirements
- A borrower who wishes to do an FHA Cash-out Refinance has to meet these requirements:
- An occupant of the property
- Has owned the home for at least 12 months
- With no late payments on the mortgage
- With monthly housing debt of at most 29 percent of the gross monthly income
- With total housing debt of at most 41 percent of the gross monthly income
If the borrower is not an occupant of the property, for example, if he is just purchasing it as an investment or renting it out, he is not qualified to get the FHA Cash-out. He should also have owned the property for at least 12 months and never had payments more than 30 days late.
Take note that the monthly housing debt mentioned above includes the principal loan amount, interest, homeowner’s insurance, mortgage insurance, taxes, and homeowners association dues. The total monthly debt is a combination of the monthly housing debt plus consumer debt.
Credit Score Requirements
Just like most loans, the credit score determines your eligibility to qualify an FHA Cash-out Refinance. Generally, the acceptable credit score is at least 580. According to FHA guidelines, those with a credit score of at least 500 may still qualify, but with an LTV limit of 90 percent.
These numbers are subject to change from time to time because of the constantly changing market conditions. Lenders may impose their own minimum credit score requirement so check with your FHA-approved lender for details.
How To Prepare for an FHA Cash-out Refinance Loan
There are a few things to keep in mind if you are considering to refinance your mortgage. It involves planning, budgeting, and saving for loan expenses.
- Look for FHA-approved lenders
- Obtain an updated information on mortgage value
- Understand the loan expenses
- Establish good payment history
- Request for credit report
When shopping around for a new lender, make sure you find one that participates in the FHA loan program. You should also get the most recent information on the value of the home to get the most out of the refinancing.
You may incur expenses while preparing for the refinancing such as closing costs. It is important that you do your research to avoid tricky and unfair charges. Remember, the most common reason why borrowers opt for cash-out refinancing is to get money out of it. You shouldn’t spend more than what you will get.
Before you apply for refinancing, make sure your credit report is correct. You can do this by requesting a copy of your credit report. Experian, Equifax, or TransUnion can provide you with a free copy. This is to make sure that there are no discrepancies in your credit report. If you think the report has issues, file a dispute to the credit bureau. You should hear back from them within 30 days.
Establish a good payment history with your existing mortgage. Make sure not to miss a payment for at least 12 months. Payments are considered late 30 days after the monthly due date. If you missed or paid late even just once within the 12-month period, it might not be the best time to apply for refinancing yet.
Preparing for an FHA cash-out refinance loan is not easy and may take some time. However, it is not impossible. When done right, you will be more creditworthy and reap the benefits of your own hard work.