Home owners who have an FHA mortgage may want to take advantage of low interest rates by doing a FHA refinance in 2017. If you are one of them, know that there are two types of FHA refinances to consider. Below are more details about FHA loan qualifications you will need for either type.
You can choose to do either an FHA cash-out refinance or an FHA streamline refinance. The cash out refinance option allows you to pull out equity to use for whatever you like. You will open a new loan with a larger balance than what you owe.
The FHA streamline refinance is simply refinancing your existing FHA mortgage with little documentation needed. You will not be able to receive any cash equity at closing, however.
More About the Cash Out Refinancing with the FHA Insured Program
Probably the biggest benefit of this FHA program is that you can take out some of your cash equity to use on what you like. Many people decide to do a cash out refinance to get cash to do some of the following:
- Do home improvements, which can enhance the value of the home
- Pay for education costs, such as college tuition
- Buy a new car or pay off a car loan
- Reduce credit card debt
- Invest in real estate
If you owe $100,000 on your current mortgage, you might open a cash out refinance mortgage for $150,000, and you could walk away with $45,000 or so in your pocket to use as you see fit.
You should consider whether you should pull out cash for anything that will not pay you back. Many home owners use equity to invest in real estate or to do home renovations, both of which have the possibility of paying you back in either cash flow or enhanced home value.
Another major benefit of the cash back FHA refinance is that you can get a lower interest rate or a different loan term if you prefer. You might drop your interest rate .5% or even more, depending on your current rate and the state of the market. As of mid-2017, rates are on a steady rise, but they are not expected to exceed 5% this year.
Reducing your loan term to 15 years will save you sometimes hundreds of thousands of dollars in interest on your home loan.
The cash out refinance option insured by FHA also has some down sides to consider. All FHA mortgages require you to pay for mortgage insurance upfront as well as a monthly insurance premium. These extra costs need to be weighed, especially if you have more than 20% equity in your home. In that case, you may want to think about a conventional cash out refinance.
Cash Out Refinance Qualifications Under the FHA Plan
If you want to pull out money with an cash out loan, you will need to meet the following qualifications:
- Income: You need to have enough income to qualify for your new loan. After all, you will have a higher loan balance and will need to make a higher payment. You will usually need to provide your two most recent pay stubs, two years of tax returns and two years of W2 forms.
- Assets: Your FHA-approved lender may want to see bank and investment statements, but this is not required.
- Appraisal: The lender will require a new appraisal to determine what the value of the home is. The new appraisal amount will tell the lender what the maximum loan amount is for the refinance loan.
- Credit: You do not have to meet a minimum credit score standard to pull out cash, but each lender can have their own standards. You will usually need to have a credit score of at least 640 to take out cash.
- Payment history: You need to have no more than one payment 30 days late in the last year. The current mortgage has to be a minimum of six months old for FHA loan qualifications.
- Ownership time: If you have been in the house for under a year, the lender will use either the lower of the original purchase price or the appraised value.
- Affordability: You need to meet FHA approved debt to income ratios to pull out cash. The maximum current guidelines are 29% and 41%, but you may be able to qualify for more. The 29% ratio is obtained by dividing your house payment by gross monthly income. The total debt ratio is 41% and will include your full house payment plus your other credit obligations.
More About FHA Refinance Streamline
An FHA streamline-refinance is easier to qualify for than a cash out refinance of an FHA mortgage. All you need to do is show that you have paid your FHA loan on time for the last 12 months.
You will not need to show your current level of income, your credit history in most cases, or anything about your current job situation.
The purpose of an FHA streamline is usually just to lower your rate if the current rates are lower than what you are paying now. You also may choose this type of refinance if want to move from a 30 year to 15 year mortgage.
The Bottom Line
Doing an FHA refinance to either pull out cash or to reduce your rate is now easier than ever. You will need to meet qualifications guidelines to pull out cash, but to just reduce your rate, you will not need to do much of anything other than apply. As long as you have paid your mortgage on time, you should not have a problem qualifying.