What’s an FHA Money-Out Refinance?
Are you thinking about doing some home improvement, like adding an extension or remodeling a kitchen? You may want to consider an FHA cash out refinance. The FHA cash out refinance loan usually allows you to refinance your mortgage at a lower interest rate and deduct up to 80% of the equity you have in your home for remodeling or renovation (as well as debt consolidation and other reasons). Equity is the difference between the current value of your home and the amount you owe on the mortgage.
The central theses
- FHA disbursement refinancing works like other disbursement refinancing loans. For example, if you owe $ 200,000 on your mortgage, you might get a new loan of $ 225,000. Of that, $ 200,000 will pay off your previous loan and the $ 25,000 will be yours for your home improvement project.
- FHA loans are good for people with lower credit scores and are more forgiving than other loans with regard to debt ratios.
- An FHA cash out refinance allows you to borrow money to upgrade your home at the current low interest rates by using the equity built up in your home.
How much money can you withdraw?
The amount of money that you can borrow from an FHA payout refinance depends on the amount of equity that you have built up in your home. However, you need to have at least 20% of the equity left after you refinance and withdraw some cash. In other words, you cannot take all of the available equity with you.
You can get an idea of how much your home is worth by using websites like Zillow for an estimate. Then subtract your mortgage debt from the appraised value of your home. If you owe $ 250,000 but your home is now worth $ 450,000, that leaves you with $ 200,000 in equity. You could take out a total loan of $ 360,000, which is 80% of the value of your home. Of that, $ 250,000 will be used to pay off your mortgage and $ 110,000, minus closing costs, will be available for your payout.
Who Can Qualify for FHA Cash Out Refinance?
According to FHA guidelines, applicants must have a minimum score of 580 to qualify. However, most lenders who offer FHA cash out refinance loans have their limits which usually require a minimum score in the 600-620 range. Some lenders use the middle score when there are three different scores. Others may require the lowest score to qualify. Your lender is your best source for information about your creditworthiness requirements.
To ensure that you can afford your new mortgage payment without getting overwhelmed, the FHA has guidelines about debt to income ratio you need to qualify. This can be calculated in a number of ways, but essentially it is about how much debt you have compared to your gross monthly income. The two different calculation methods include:
- The income mortgage payment is calculated by dividing your total housing costs (principal, interest, taxes, insurance, HOA fees, etc.) by your gross monthly income. This number must be below 31%.
- The total fixed payment to income is calculated by dividing your total mortgage payment (principal, interest, taxes, insurance, HOA fees, etc.) plus any of your recurring monthly expenses such as student loans, credit card debt, car loans, etc. Divide this amount by the monthly Gross income. This is your debt ratio and must be below 43%.
A loan-to-value, or LTV, is the amount of equity that you have built up in your home. For example, if you have a $ 315,000 mortgage but your home is worth $ 500,000, the difference of $ 185,000 is your LTV. To qualify for an FHA cash out refinance, the amount you owe on your mortgage cannot exceed 80% of the value of your home. For example, if your home is worth $ 500,000, 80% is $ 400,000 ($ 500,000 x 0.8). If you owe more than $ 400,000, you will not qualify for FHA disbursement refinance.
Length of stay
The FHA also has a residency qualification to qualify for the cash out refinance loan, which requires you to live in your home and have the mortgage you will be refinancing for at least 12 months.
Mortgage Payment History
To be approved for FHA disbursement refinance, you must also have a timely payment history for your mortgage for the past year. This means that you cannot be in default of payment within the last twelve months.
FHA cash out refinances usually have low interest rates. On average, they will be 10-15 basis points (0.10-0.15%) lower than traditional refinancing loans with disbursements. However, because the FHA offers more flexibility in loan and debt ratios compared to traditional loans, you will need to take out mortgage insurance for the loan with upfront and monthly mortgage insurance premiums (1.75% of the new upfront loan amount and 0.85% of the loan amount) . annually in 12 payments per year).
The bottom line
Despite the added insurance, if you need a refinance loan with disbursement and have a higher debt-to-income ratio or lower credit score, FHA disbursement refinance is a good product to consider. For those with a good credit rating and 20% equity, conventional cash-out refinancing would be more cost-effective.
What is an FHA Cash Out Refi Loan?
An FHA cash out refinance loan is a refi of an existing loan that is supported by the Federal Housing Authority. While FHA cash out refi loans act like a traditional refi loan, they must meet certain loan-to-value and debt-to-income standards as per the guidelines and underwriting standards required by the FHA.
What is a debt to income ratio?
A debt-to-income ratio is simply a percentage calculated by dividing your total debt obligations (mortgages, car loans, personal loans, credit card amounts owed, student loans, etc.) by your gross income. The FHA requires borrowers to have a debt to income ratio of 43% or less. Another method of calculation is to simply divide all home-related expenses (mortgage, interest, taxes, insurance) by gross income. According to FHA standards, this ratio must not exceed 31%.
What is a loan-to-value ratio?
A loan-to-value ratio that calculates how much of a paid refi loan is granted by a lender based on a borrower’s equity in their home. The FHA’s underwriting standards require that refi loans must meet an LTV of 80% or less of the appraised value of the home. So, if a borrower wants to refinance a mortgage on a home worth $ 500,000, the maximum refi loan is $ 400,000.