Do you want to refinance your FHA loan into a lower rate and get cash back? How about pull out some cash for a home improvement? You can possibly do both with an FHA cash out refinance.
More and More People Have Turned to FHA for Cash Out Refinancing in 2017
In 2017, home prices are going up and mortgage rates are stabilizing and are still very low. It could be a great time for you to refinance your FHA loan. Keep reading for more information and current FHA refinance guidelines for cash out transactions.
Overview of the FHA Cash Out Refinance Program
An FHA cash out refinance allows you to replace your current mortgage with another mortgage, as well as get cash, if you have sufficient equity in your property. You will be opening a new loan with a larger balance than you have today, with the excess cash going to you.
What Are the Benefits of an FHA Cash Out Refinance?
There are two benefits for the most part: You usually get a lower interest rate, and you also get cash that you need for a variety of major purchases or whatever you want to use it for. Your cash out refinance equity can be used for anything, but these are the most common uses:
- Improving your home – this can be a very good idea if done right. You may be able to add value to your home and get more when you sell.
- College education costs – depending upon interest rates, you may be able to borrow money less out of your home than you would pay on a college education loan.
- Investing in real estate – if you can find good, cash flowing real estate that earns a good rate of return, this can be a really good way to add monthly income.
- Paying off debt – if you have credit card or other high interest debt, you can pay it off with home equity and usually pay a much lower interest rate.
Let’s look at a quick example. If you owe 100,000 on your house, you could establish an FHA cash out loan for 150,000, if you have enough equity and you can qualify. If you had to pay $5000 in closing costs, you could theoretically get $45,000 in your pocket for whatever you want.
FHA cash out refinance loans also can be taken out for other purposes. You also can take the opportunity to get a lower rate, or move into a 15 year fixed loan. Or, you might move from a fixed rate into a lower adjustable rate.
Cash out FHA refinance loans usually have more flexible qualification guidelines. If you have a lower credit score, you will not necessarily be barred from refinancing. You also can have a higher debt to income ratio than a conventional loan and still qualify.
An FHA cash out refi lets you open a new loan with as much as 85% of the current value of the home. Many people have trouble qualifying for that high of an LTV with a conventional loan.
Guidelines for an FHA Cash Out Refinance Loan
If you think you want to do an FHA cash out refinance, here are the current 2017 guidelines:
- Income: You need to show on paper that you have enough income to be able to pay the new loan each month. You need to have your income verified with two recent paycheck stubs that show your current and YTD earnings. You also will need to produce your W2 forms from the last two years, and may need to show your last two tax returns. This latter point is important if you are self-employed.
- Assets: You do not usually need to show reserve funds to qualify for an FHA loan. But the loan officer still may request bank statements or investment account statements.
- Appraisal: To determine the FHA cash out refinance LTV, you will need to have a new appraisal done. The value of the appraisal will tell you how much money you will be able to get on the new loan. As of 2017, the maximum loan for an FHA cash out refi is 85% of the home’s value. The home needs to have been bought a year or more ago, and it cannot go over the loan limits established by FHA for your county. With a FHA cash out refinance LTV at 85% that means that underwriters will verify that there is at least 15% equity left in your house after the cash out amount is calculated.
- Credit: There is no minimum FICO score needed to get a cash out refi loan. But most lenders will have their own internal requirements for your FICO score. Generally, you will need to have a score of 640 to 680 to qualify.
More qualifications as of 2017 for an FHA cash out refinance loan are as follows:
- FHA cash out refinance loans can only be for owner occupied properties, not rental properties
- Mortgage payment history: You need to have not had any late payments in the last 12 months that were more than 30 days late
- If you have been in the home under a year, the lender will use the lower of the appraised value or the original purchase price of the property to figure what the maximum loan amount.
- The maximum FHA debt ratios are currently 29% and 41%, but you may be able to qualify for higher ratios. The first ratio is for just hour total housing payment and your gross monthly income. The second ratio includes your housing payment plus all other debt payments each month.
Considerations for FHA Refinancing
FHA cash out refinance loans have some down sides. Every FHA loan has an upfront mortgage insurance cost, as well as a monthly insurance cost. You will need to pay an upfront premium of 1.75%, and you also have to pay a variable monthly fee for mortgage insurance that often can be approximately $45 for every $100,000 borrowed.
Because of these costs, you may want to consider a conventional cash out refinance if you have a lot of equity in your home, or if you have very high credit scores.
4 Tips for Cash Out Refinance with Low Credit Scores
An FHA cash out refinance loan is a great product for people with more average credit scores, and those who may have a foreclosure or a few late payments on their record. You should check out the FHA cash out refinance for bad credit today.
Mortgage interest rates in 2017 are still quite low, with a typical rate of 4.25% or so. While rates have edged up over the last year, historically the rates are still low. So it is still a good time to consider a cash out refinance.
A cash out refinance allows a home owner to kill two birds with one stone:
- Get a lower interest rate than you have now. This can help you to save hundreds of dollars per month in interest charges, and tens of thousands in interest over the life of the loan.
- Pull cash out of your home. Use your built in equity to pay for things that you need, such as a new business, college education, home repairs and more.
But what if you have a low credit score? How can you do your cash out refinance with bad credit? Well, refinancing with a low credit score is not the ideal situation, but there are still ways that it can be done. You will pay a higher interest rate, but it still might be worth pulling the trigger if the loan is at least one point lower than your current interest rate.
If you have low credit and still want to refinance, below are some good tips to make your cash out refinance easier:
#1 Find a Cosigner
If you have a family member with good credit who you trust (and who trusts you), that person can cosign on the mortgage. You are using his or her credit to help you to qualify for the loan. The cosigner will be responsible for paying off the loan along with you and must sign all documents to get the loan.
Getting a relative with a FICO score of over 700 and good income can make it easier to get approval for your cash out refinance. But remember – that person is on the hook for the loan. If you don’t pay, he or she has to or their credit will take a big hit. Talk to a mortgage refinance lender about whether or not a cosigner is needed in your situation.
#2 Check with a Lot of Cash Out Lenders
One of the common mistakes that people will low credit scores make is to assume that because they have a 600 credit score that they cannot refinance. This is not always the case.
There are thousands of cash-out lenders in America today. Credit requirements are looser than they were in 2009. Thus you may be in a better position to refinance than you think.
For example, there are many FHA-approved lenders that have varying requirement for new home loans and refinances. FHA sets up minimum credit score requirements, but lenders may have varying requirements in terms of credit scores and incomes. It is important for you as the home owner to shop around to see if there is a lender who can help you.
#3 Consider an FHA Cash Out Refinance
The FHA loan is one of the best things that has happened to American home owners ever. FHA cash out refinance loans are guaranteed by the US government, so the lender is more likely to lend to people with low credit scores.
Lenders want to have a larger pool of possible home owners to work with, but they must be careful to not take too much risk for their investors. The FHA guarantee allows them to offer many more home loans each year, including those who want to FHA cash out refinance with bad credit.
FHA underwriting guidelines are more flexible than conventional mortgages, and it is easier for you to qualify with lower income and credit.
#4 Increase Credit Score
There are things that you can do to improve your credit score in only a few months. First, pay every bill on time. Make sure no credit cards or other loans are 30 days late. Ideally, pay every bill by its due date, but usually if you are a few days late, you will have to pay a late fee but it does not get reported to the credit bureaus. But never be 30 days late! This will put a big black mark on your credit.
If you have negative marks on your credit report, do your best to have everything on time for a year. This will increase your score.
Another way to boost credit fast is to pay off your credit cards. If you get rid of $5000 in credit card debt, your score can go up at least 40 points in many cases.
Also consider becoming an authorized user on a credit card that someone you know has who has good credit. Some credit cards, such as Discover, will report on time credit card payments on your credit report if you are an authorized user on someone’s account. Be sure that person has good credit and is reliable!
There are more options today than five years ago to do a cash out refinance with a low credit score. We recommend that you try the above tips to get a refinance today for the cash you need.
Pros and Cons of the FHA Refinance for Cash Out
Home owners with an FHA lien have two major loan refinance options. The first is the streamline refinance, and the other is the FHA cash out refinance.
The streamline refinance with the FHA loan is a good move for the home owner who has a higher rate mortgage and the current interest rates are more than .5% or so below your rate. A streamline refinance can be done with minimal paperwork and can be completed in a few weeks.
The other option is the FHA cash out refinance loan. This loan gives you cash in your hand when you refinance to a lower interest rate. You will open a new loan with a larger balance than what you owe now. The excess money is your equity and it goes to you.
However, like any cash our refinance loan, the risk is higher for the lender. So, the FHA refinance for cash out does require full documentation.
If you are considering an FHA refinance for cash out, keep reading to learn the pros and cons.
Pros of an FHA Cash Out Refinance
The biggest benefit of a cash out refinance with FHA is that you will get the cash that you need for various expenses. The funds can be used for many things that people need a large amount of cash for. The most popular uses are:
- Improving the home – this can add value to the property if it is done right
- College costs – the interest rate on a home loan is often much less than a college loan
- Consolidate your credit card debt – most credit cards have a rate of 18% or higher. You can save thousands in interest in some cases by using your FHA cash out refinance proceeds. This only makes sense however if you have the financial discipline to not run up the cards again!
- Invest – if you can find real estate or another investment that you are confident will pay you an interest rate above what you pay on the loan, this can be a good financial move
- Paying for medical costs – health care in the US is very expensive, and you may want to pay for a major medical expense with a low interest home loan
Here is a simple example of how an cash out FHA refinance loan works. You might owe $100,000 on your house, and you open an FHA cash out refinance loan for $150,000. If your home has enough equity and you can qualify, you may be able to get $45,000 in your pocket after closing costs.
One thing borrowers love is that the FHA cash out refinance LTV is 85%. So, that means an applicant only needs 15% home equity after the cash-back is factored in.
Another possible benefit of the refinance loan is that you can potentially move from a 30-year to 15-year loan, or from a fixed to an adjustable loan, or vice versa.
Cons of an FHA Refinance for Cash Out
Every financial move usually has downsides, and the FHA cash out refinance is no exception:
- All new loans have closing costs. Your new loan will have several thousand dollars in closing costs. It is up to you whether you want to pay those out of pocket or with a slightly higher interest rate over time.
- All FHA financing has a requirement for upfront mortgage insurance and a monthly insurance premium. The upfront cost is 1.75% of the loan amount. The monthly amount is .80% of the amount of the loan per year. So, this could be $67 for every $100,000 you borrow. Also, monthly mortgage insurance on FHA loans today must be paid for at least 11 years, not just five as in previous years
- If you have more than 20% equity, you may want to consider refinancing into a conventional loan, as there is no PMI requirement
FHA Cash Out Refinance Guidelines
Because you are pulling out cash, you are required to show that you have sufficient income to pay the new loan amount. The borrower must have their income verified. This will require recent pay stubs, W-2s for two years, and sometimes tax returns for the last two years.
Also, you must typically have your assets verified in the form of investment and bank statements.
Next, the home has to be appraised to see if the home has sufficient current equity to serve as collateral for the loan. The current maximum loan amount for this type of loan is 85% of the value of the home. Some states may limit your loan to 80% LTV.
Regarding credit, you need to have a bare minimum 500 credit score. But you will usually need to meet higher credit standards of the individual lender. Expect to need a credit score of 620 to 680 and the higher the better.
To qualify for cash back refinance with FHA, you cannot have been late over 30 days on more than one payment in the last 12 months. The current mortgage has to be at least 180 days old.
Getting cash out with a FHA refinance loan often makes a great deal of sense. If you have a good reason to get the money, this is one of the best, low interest loans that you will ever be able to get.
References: Tap into Home Equity with an FHA Cash Out Refinance 2017. (n.d.). Retrieved from https://mymortgageinsider.com/fha-cash-out-refinance-guidelines/