FHA Money-Out Refinance: Who Is Eligible?
You love your home, but you’re fed up with popcorn blankets and want to replace them. Or maybe your child has just arrived at their dream school and you want to help with tutoring. Either way, your home can be a useful resource when you need a lot of cash. If your home is worth more than your mortgage balance, you can use it to obtain an FHA refinance loan with payout.
The central theses
- FHA cash-out refinance loans are insured by the Federal Housing Administration but are made by private banks, credit unions, and online lenders.
- You can refinance your mortgage more than you owe and receive the difference in cash.
- The maximum loan-to-value ratio for FHA cash-out refinancing loans is 80%.
- You must have a credit score of at least 500 to qualify for a loan, but a higher credit score will result in better terms.
This is how FHA cash out refinance loans work
If you own a home and have equity accumulated in it – meaning the property is worth more than you owe on the mortgage – you can use an FHA cash out refinance loan to take advantage of that equity.
With a cash-out refinance, you take out a new mortgage for more than you owe on your current mortgage (which is then paid off) and the lender will return the difference to you as a lump sum. The money can be used at will; there are no restrictions on its use.
The FHA refinancing loans are insured with the Federal Housing Administration. Because of this government support, you may be eligible for lower interest rates than other mortgage refinancing and you may qualify even if you do not have an imperfect loan.
Who Is Eligible for an FHA Cash Out Refinance Loan?
If you are interested in refinancing your mortgage, you can use an FHA disbursement refinance loan even if your current home loan is not an FHA mortgage.
However, there are a few requirements that you must meet in order to qualify for a loan:
- Type of house. FHA cash out refinance loans can only be used for primary housing. Investment properties and vacation homes are not eligible.
- Time at home. You must have owned and lived in the apartment for at least 12 months.
- Payment history. In the past 12 months, all of your mortgage payments must be made within the month due.
- Loan-to-value ratio (LTV). The maximum loan-to-value ratio (LTV) for an FHA cash-out refinancing loan is 80%. This means that the amount you owe on your existing mortgage cannot exceed 80% of the current home value. For example, if your home is worth $ 200,000 and you owe $ 170,000 (an LTV of 85%), you will not be eligible for the refinancing option.
- Credit score. The minimum credit score you need for an FHA loan is 500. However, some FHA approved lenders have higher credit requirements. In general, you can qualify for lower interest rates if you have a good to very good credit rating, i.e. a score between 670 and 850.
How Much Money Can You Get With an FHA Cash Out Refinance Loan?
As mentioned earlier, to qualify for a refinance loan with payout from an FHA-approved lender, you cannot owe more than 80% of the value of your home. You must have 20% equity in your home even after refinancing. This limits how much of your equity you can “cash out”.
To estimate how much money you can get, you first need to find out the current value of your home. You can see what similar homes have been sold for recently in your area, ask a local real estate agent for an estimate, or hire a professional appraiser for a more accurate estimate. You can find out how much equity you still have based on your mortgage statement or the mortgage amortization table.
For example, let’s say your home is currently valued at $ 250,000 and you owe $ 150,000 on your mortgage. With a cash-out refinance, you could borrow up to $ 200,000 – 80% of the current value of your home – after which you would still have 20% equity in the home if needed.
The new $ 200,000 mortgage pays off the remaining $ 150,000 of the old mortgage, leaving you with $ 50,000 in cash. As with other mortgages, FHA loans have closing costs that reduce the amount of money you go with. For example, if your cost is the median for FHA loans ($ 6,868) that leaves you with $ 43,132.
Pros and Cons of FHA Cash Out Refinance Loans
Before applying for an FHA cash out refinance loan, you should carefully weigh the potential benefits and risks compared to other types of borrowing.
- Low interest rates. FHA loans generally have very low interest rates – often below 4%. This makes them a relatively inexpensive way to take out credit compared to other forms of credit such as personal loans or credit cards.
- Low credit score. FHA loans typically have lower credit score minimums than many other types of credit. You can qualify for a loan with a score of 500 or more.
- Higher loan amounts. Because you are borrowing against the equity of your home, you can get more money with a withdrawal refinance than you could possibly get through a personal loan or line of credit.
- Increased debt. With a disbursed refinance loan, you take out a mortgage for more than you currently owe. That means higher monthly payments and a greater risk of falling behind if you lose your job or run into other financial difficulties.
- Your home is in danger. As with other types of mortgage, your home acts as collateral for the new loan, and the lender can lock it up in the event of a default. With other unsecured loans, such as a personal loan or credit card, your home is not used as collateral and is not at risk in the same way.
- Closing costs and fees. When applying for an FHA refinance loan with payout, you will have to pay closing costs and fees, which will reduce your available cash by thousands of dollars. Other types of borrowing have fewer fees but may have higher interest rates.
If you decide that an FHA cash out refinance loan is right for you, you can use the US Department of Housing and Urban Development database to find an FHA approved lender near you.
What is an FHA Cash Out Refinance Loan?
With an FHA cash-out refinance loan, you take out a larger mortgage to pay off your current one and receive the difference in cash. You can then use this money for any purpose.
When Does An FHA Cash Out Refinance Loan Make Sense?
An FHA cash out refinance loan can be a relatively inexpensive way to borrow money for a larger expense, such as a home loan. B. for the remodeling of a home. FHA loans currently have an interest rate of around 4%, a small fraction of what you would have to pay for credit card debt, for example.
What Are the Risks of an FHA Cash Out Refinance Loan?
The main risk is that by taking out a larger mortgage, you will find yourself in greater debt. Your monthly mortgage payments are higher and could potentially become prohibitive if you lose your job or other source of income. In the worst case scenario, the lender could foreclose your home and you could lose it.
What’s the best I can get from an FHA Cash Out Refinance?
You can borrow up to 80% of the current value of your home. For example, if your home is worth $ 300,000, the maximum value is $ 240,000. After you have paid off your existing mortgage, you can receive the remaining money as a lump sum. So if you borrowed $ 240.00 and your existing mortgage still has a balance of $ 140,000, you could “pay off” $ 100,000.