If you have an existing FHA loan, you may be eligible for an FHA cash out refinance. This loan allows you to use the equity of your home to pull cash out when you are in need. These funds can be used to pay for home improvements, school, debt consolidation, or any other need that arises. Although the money can be used however you see fit, the reason for the loan is taken into consideration during the approval process. And it’s important to keep in mind that you will have a higher loan-to-value ratio and a higher payment after the loan is paid out.
What are the Requirements?
FHA cash out refinance loans have requirements that must be met, just like any other loan.
- Credit – While each lender is different, most will not approve credit scores under 640. There are exceptions to this rule, but you must be able to prove compensating factors.
- Late Payments – The most important factor in your approval is your mortgage payment history. Multiple 30-day late payments in the previous 12 months will not be accepted.
- Residency – In order to qualify for an FHA cash out refinance the home must be your primary place of residency.
- Debt Ratio – Again, every lender had their own guidelines, but most want a debt ratio of 41% or less after the loan.
- Maximum Loan to Value – You cannot exceed 85% of the homes value for an FHA cash out refinance.
Just as when applying for standard FHA loan, you will need provide proof of steady employment, income, and assets and other documentation as requested by your lender.
Take time to understand the fees involved in an FHA cash out refinance prior to getting involved. The FHA charges upfront mortgage insurance, which is 1.75% of the loan amount. Even if your original loan is an FHA loan and you have already paid this fee, you will need to pay it again. You will also need to pay monthly mortgage insurance until such time as the loan is refinanced. The insurance is .85% of the base amount of the loan divided by 12 payments per year. It is important to weigh this additional cost when deciding is an FHA cash out refinance is the best choice for your situation.
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