FHA Money-Out Refinance Necessities and Tips
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An FHA cash out refinance can be an easy and inexpensive way to access your home equity for a variety of productive purposes. With the money from a cash-out refinancing, you can, for example, consolidate high-interest debt, complete home improvement projects, or purchase an investment property.
FHA cash out refinances also have less stringent credit and income requirements than other consumer loan options, but still offer competitive rates.
Here’s a closer look at the FHA payout refinances:
What Is FHA Cash Out Refinance And How Does It Work?
An FHA cash out refinance allows you to refinance your existing FHA loan while withdrawing a lump sum in cash.
Similar to a traditional cash-out refinance, you get a new interest rate and new repayment terms and can borrow up to 80% of the home value minus your remaining loan balance. The main difference is that your new loan will be insured by the Federal Housing Administration, not a lender.
You can use your one-time payment however you want, but here are some common reasons people tap into their equity:
- House renovations
- Emergency bills
- Credit card debt
- Personal Loans
- Training costs
- Second home purchase
In addition to flexibility, FHA loans often have lower interest rates than personal loans and credit card rates, which makes them more attractive to homeowners.
What about taxes? Due to the 2017 federal tax reform, your mortgage refinancing payments are less likely to be tax deductible. However, your payments may be eligible for mortgage interest deduction if you use the funds to make qualifying capital improvements and file a detailed tax return.
While mortgage interest payments are more difficult to deduct, your home rental is not considered taxable income – it is considered a loan. As a result, this cash-out refinancing can be treated better for tax purposes than distributions from a tax-privileged retirement savings account.
FHA Cash-out Refinancing vs. FHA Streamline Refinancing
An FHA cash-out refinancing is different from the more popular FHA streamline refinancing program. Optimize refinancing, on the one hand, they do not require a home valuation or credit check.
To qualify for an FHA Streamline Refinance, you can only refinance a current FHA loan. The FHA disbursement program, on the other hand, is open to conventional mortgages and government-supported home loans such as VA loans and USDA loans.
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How Do You Qualify for an FHA Cash Out Refinance?
To qualify for an FHA cash out refinance, you must meet the minimum credit scores, debt-to-income ratio (DTI), and home equity guidelines set by the lender.
Here are some of the basic FHA withdrawal refinancing requirements that you need to meet:
- Minimum. Credit Score: 500
- Max DTI: Between 43% and 50%
- Max loan-to-value ratio (LTV): 80%
- Minimum. Home Equity: 20%
- Minimum. Occupancy period: at least one borrower must have lived in the apartment for at least 12 months before submitting the application
- Payment History Requirements: You must have made on-time monthly payments for at least 12 months before applying
- Qualified Mortgage Types: Conventional, FHA, VA, and USDA
A lender may have different requirements than the FHA refinancing guidelines listed above. For example, you may need a credit score of at least 580 to qualify with some lenders, and mortgage companies often want your DTI to be no greater than 43%.
Be sure to compare other home refinancing options to find the best loan terms. You may be able to get a better deal by converting your FHA loan to a conventional loan.
|FHA cash out refinancing||Conventional cash-out refinancing|
|Minimum. Home equity||20%||20%|
|Assessment obligation||Yes sir||Yes sir|
|Paperwork||Proof of income, utility bills to prove at least 12 months of residence, and the last 12 mortgage payments||Proof of income, credit report and tax returns|
|Mortgage insurance||For the life of the loan||None if you have at least 20% equity|
Learn More: FHA vs. Conventional Loans: Which One Is Right For You?
What does an FHA cash-out refinance cost?
As with a traditional mortgage, you pay the closing costs to refinance your current FHA household loan. These fees are around 2 to 5% of the loan amount. Some of the completion fees may include:
- Appraisal fees
- Upfront Mortgage Insurance Premium (UFMIP)
- Credit report
- Origination fee
- Lender’s Fees
All FHA loans have an upfront mortgage insurance premium of 1.75% of the loan amount. It is possible to obtain a refund credit to offset this burden if you refinance an FHA-insured mortgage within the first three years. Refinance is higher if you refinance earlier.
You will also pay an annual premium for mortgage insurance for the duration of the loan. The only way to remove FHA mortgage insurance is to refinance it into a conventional loan.
Advantages and disadvantages of FHA cash-out refinancing
Here’s a closer look at the pros and cons of using the FHA cash out refinancing program.
- Flat-rate payout: You receive a flat-rate amount of your available home equity. The funds can be used to improve your property, pay off student loans, or cover other expenses.
- More Relaxed Borrower Qualifications: It may be easier to qualify for an FHA Withdrawal Refi than a traditional Withdrawal Refi if you have poor credit. Additional requirements may still apply to lenders.
- Non-FHA Loans Can Qualify: Both FHA loans and non-FHA loans qualify for FHA disbursement refinances. Because they are insured by the government, the FHA loan rates are sometimes better than traditional lenders.
- New repayment terms: Refinancing allows you to qualify for a new interest rate and a new monthly payment. Thanks to today’s historically low mortgage rates, your new terms may be cheaper than your existing mortgage.
- FHA Mortgage Insurance Premium: FHA loans charge an advance payment for the mortgage insurance premium when you sign the closing papers. And unlike other payout refinancing options, you also have to pay a monthly mortgage insurance premium for the life of the loan (unless you are refinancing into a conventional loan).
- Lending ratio of a maximum of 80%: You can only refinance your remaining capital and equity up to 80% of the real estate appraisal value. The first 20% of your home equity is inaccessible and will help secure the loan.
- Potentially higher interest rates: The interest rates for refinancing loans with a cash-out are usually higher than those for refinancing without a cash-out. You need to decide whether the use of your home equity is worth the potentially higher interest rate and monthly payment.
- Closing costs and credit check: The application process for the FHA cash-out refinancing requires a tough credit check, closing costs and an evaluation fee. These costs can offset the potential benefits of withdrawing home equity and introducing new repayment terms.
Read on: HELOC vs. Home Equity Loans: How You Choose
About the author
Josh Patoka is a personal finance officer and contributor to Credible. His work has been featured on Fox Business and several award-winning personal finance blogs, including Well Kept Wallet, Wallet Hacks, and Frugal Rules.
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