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If you have equity in your home, you may want to exchange the equity for cash. Many loan programs allow cash out, but can you do a cash out refinance on a FHA loan? Yes!
An FHA cash-out refinance lets you consolidate consumer debt, make home renovations, stash it in an emergency fund, or use the cash for another expense. The FHA doesn’t tell you how to use the funds, but you have to qualify for it first. Ready to learn how an FHA cash-out refinance works? Let’s dive in.
What Is FHA Cash Out Refinance?
The FHA cash out refinance is a little different than other home loans. It lets you borrow more than your current loan balance, take the cash out, and use it for something else.
When you refinance with the FHA refinance with cash out, the lender pays off your existing loan and gives you the remaining proceeds to use for other purposes. Keep in mind this will increase the balance you owe, and a higher balance will likely increase the mortgage payment you make each month.
FHA Cash Out Refi Guidelines
Like a standard FHA loan, the FHA refinance cash out guidelines are flexible. It makes it easy for most borrowers to qualify, especially if you already have an FHA loan.
Credit Scores For FHA Cash Out Refi
Some borrowers can get approved with a credit score as low as 580 on an FHA loan. But each lender sets its own FHA cash out refinance credit score requirements. Remember, the higher your credit score is, the better terms and interest rate you could get.
FHA Cash Out Refi Debt to Income Ratio
The FHA considers your debt-to-income (DTI) ratio because it shows how much of your income you already use to pay debts. A high DTI can make it hard to keep up with your payments, putting you at risk of default.
To calculate your DTI, add up your monthly debt payments and divide it by your gross monthly income. Your gross monthly income is how much you earn before taxes and other deductions are taken out.
The general rule of thumb for lenders is: The total of all debts, including car payments, credit card payments, other personal loans, and your mortgage payment, shouldn’t exceed 43% of your gross monthly income.
Maximum Loan to Value For FHA Cash Out Refi
If you’re looking to take equity out of your home, you probably wonder if there’s a maximum amount you can borrow. There is, and it’s called the loan-to-value (LTV) ratio.
What Is The Max LTV For FHA Refinance?
The current FHA guidelines allow you to borrow as much as 80% of the home’s value for a max LTV of 80%. Here’s how the FHA cash out refinance LTV works.
Let’s say your home is worth $250,000 and your current loan balance is $100,000. That means you have $150,000 of equity in your home.
But a FHA cash out refinance lets you borrow up to 80% of your home’s value, so you can “cash out” as much as $200,000.
FHA Refinance Payment History Requirements
You typically need to have 12 months of payment history to qualify for an FHA cash out refinance, although most borrowers wait much longer.
That’s because you can only borrow 80% of your home’s value. Homeowners usually need a few years to build up 20% of equity in the house.
Qualifying Requirements for Cash Out FHA Refinance
The cash out refinance FHA has many qualifying factors in addition to the credit score, debt ratio, and LTV requirements:
- Be the owner-occupant and use the home as your primary residence.
- Be on the title if you have an existing FHA loan.
- Have lived in the home for at least 12 months.
- Not have any late payments in the last 12 months.
What Does an FHA Cash Out Refinance Cost?
Like any refinance, the FHA cash out refinance has closing costs. You’ll likely pay for similar services that you paid for when you bought the home, including a new FHA appraisal.
The FHA refinance requires upfront mortgage insurance, too. The amount is a lump-sum payment of 1.75% of the loan amount.
Pros and Cons of Cash Out FHA Refinance
The FHA cash out refinance has many benefits. You’ll enjoy relaxed guidelines for a larger loan amount and the chance to tap into your home’s equity. But like any loan, there are some downsides to consider.
First of all, it isn’t free – you’ll pay for a new appraisal, upfront mortgage insurance, and other closing costs. You may also have a larger mortgage payment, which can cause financial stress if you aren’t careful about making sure it fits your budget.
How Do I Check My FHA Cash Out Loan Eligibility?
If you are ready to tap into your home’s equity, a FHA cash out loan can be a good choice. If you meet the criteria and you have a decent credit score, you’re in good shape.
Tapping into your home’s equity can help you with your financial goals, such as fixing up your home, paying off debt, or having a financial cushion to use if anything should happen. At Good News Lending, we offer many loan programs, including the FHA cash out refi.
If you want to know if you qualify, contact us, and we’ll help you navigate rates, terms and fees for a home loan or refinance that fits your needs.
