Understand Your FHA Cash-Out Options

How much money can I get with an FHA cash-out refinance loan?

Graph paper with the words FHA refinance written on it Are you looking to refinance your home and take cash out? If so, you may be eligible for a FHA cash out refinance.

With a FHA cash out refinance, you can borrow up to 80% LTV of your home's appraised value. So, if you're looking to pay off debt or make home improvements, a FHA cash out refinance could be a great option.

The money can be used with little restriction. The FHA cash-out loan can be used by homeowners who want a reduction in their monthly debt payments or more cash.

A cash-out refinance is a great alternative for people who need to make home repairs or renovate their current residence. With low interest rates, you can use the money to pay off debts that are high in interest, such as credit cards and student loans.

The existing mortgage need not be an FHA mortgage. The FHA cash-out mortgage may be substituted for an existing conventional loan.

What is the Maximum LTV for an FHA Cash-out Refinance?

An FHA cash-out refi is a loan that gives the homeowner cash back after refinancing their mortgage. The maximum LTV for an FHA cash out refinance is 80%, meaning the homeowner can borrow up to 80% of the value of their home.

This loan can be used to pay off high-interest debt, make home improvements, or cover other costs. To be eligible for an FHA cash out refinance, the borrower must have a credit score of at least 600 and must meet other eligibility requirements.

What are the requirements for an FHA cash out refinance?

An FHA cash out refinance is a home loan that allows you to borrow against the equity in your home. You can use the money for any purpose.

To qualify for an FHA cash out refinance, you need a credit score of at least 600, and
you must have been making your mortgage payments on time for the past 12 months.
The home must be your primary residence.
Your debt to income ratio must be less than 43%. Read more about DTI
You will incur an upfront mortgage insurance expense. The upfront cost can be included in the new mortgage. A monthly mortgage insurance cost is also required.
Your home must be appraised, and you must have at least 20% equity in your home after settlement.
Closing and prepaid costs may be included in the new mortgage.
You must meet all of the usual loan requirements, such as, income, monthly debt, and credit score.

What is the maximum CLTV for an FHA cash out refinance?

A second mortgage behind an FHA 1st mortgage is called subordination. The Federal Housing Administration permits an existing 2nd mortgage to remain in 2nd position with a cash out refinance; provided the 2nd mortgage agrees to remain in 2nd position; or, the second mortgage may be paid off with a cash out refinance.

The total loan amounts of the 1st and 2nd mortgages may not exceed 80% LTV of the appraised value. Lender lingo call this combined loan to value (CLTV).

What are the minimum credit score requirements for an FHA cash out refinance?

When you are looking to refinance your home, you may be wondering if an FHA cash out refinance is right for you. This type of refinance allows you to borrow against your home's equity, which can be used for a variety of purposes, such as paying off debt or making home improvements.

To qualify for an FHA cash-out refinancing, however, you must fulfill certain lender credit score guidelines.

For an FHA cash-out refinance, a minimum credit score of 500 is required. However, lenders may impose their own restrictions that exceed this credit score minimum. Therefore, it is essential to shop about and compare prices in order to get the greatest bargain available.

An FHA cash out refinance can be a great way to get access to the equity in your home.

What are the maximum debt-to-income ratios for an FHA cash out refinance?

Maximum front-end and back-end debt-to-income ratios for an FHA cash-out refinance are 29 percent and 41 percent, respectively. The front-end ratio is the proportion of your gross monthly income that goes towards housing expenses, such as the principle, interest, taxes, and insurance on your mortgage.

The back-end ratio is the percentage of your gross monthly income that goes towards all of your monthly debts, including your mortgage payment, car payments, credit card debts, and student loans. If you have a lot of high-interest debt, your back-end ratio will be higher and you may not be able to qualify for an FHA cash out refinance.

There are exceptions to the 41% back end debt ratio. It is possible that the debt percentage can rise up to 50%.

The closing costs for an FHA cash out refinance

Closing costs are generally about 3-6% of the loan amount, and they include the fees charged by the lender, as well as third-party fees like appraisal, title search, and escrow. Closing and prepaid costs can be rolled into the new loan, however, the amount of cash out will be reduced.

For an FHA cash out refinance, there is an upfront mortgage insurance premium (MIP) of 1.75% of the loan amount. This premium can be rolled into the new loan amount or paid in cash at closing.

There is also a monthly MIP (a.k.a. PMI) that is charged on all FHA loans, regardless of how much money is borrowed. For an FHA cash out refinance, this premium is 0.85% of the outstanding loan balance each month. The MIP does vary based on equity after settlement and loan length.

How long does an FHA cash out refinance take to close?

The process of refinancing with an FHA cash out refinance is relatively easy. You'll need to provide documentation proving that you meet FHA eligibility requirements, and then complete a loan application.

The application process is similar to when you initially purchased your home. After you submit the necessary paperwork to the lender, your application will be inputted into the automated software system for preliminary approval.

The appraiser will make an appointment with you to determine value and condition. Once your application is approved, the closing process will begin. The FHA cash out loan will take 30 to 60 days to complete.

Are there restrictions on the use of the funds from an FHA cash out refinance?

An FHA cash out refinance is a great way to access the equity you have built up in your home. You can use the funds for any purpose!

What are the benefits of an FHA cash out refinance over a conventional cash out refinance?

When you are looking to refinance your mortgage, you have a few options. You can go with a conventional cash-out refinance, or you can go with an FHA cash out refinance. So, what are the benefits of an FHA cash out refinance over a conventional cash out refinance?

From reading the refinance guidelines of the FHA refinance and the conventional cash out refi, is that the FHA may benefit from looser credit requirements than a conventional loan. The loan to value is the same - 80% LTV.

Second mortgages/home equity loans are not required to be paid off with an FHA loan. The second lien holder must agree to remain in 2nd position if not being paid off. This is called subordination. The combined loan to value (CLTV) must be 80% of the appraised value, or less.

Another benefit of an FHA cash out loan is that the interest rates tend to be lower than conventional interest rates.

What are the benefits of an FHA cash out refinance over a home equity loan?

When homeowners are looking for a way to access the equity they have built up in their home, they have a few options available to them. One option is an FHA cash out refinance, and the other is a home equity loan. Here are some of the key benefits of choosing an FHA cash out refinance over a home equity loan:

You can get more money with an FHA cash out refinance. The maximum amount you can borrow with a home equity loan will vary from FHA lender to lender. With an FHA cash out refinance, you can borrow up to 80% of your home’s value.
An FHA cash out refinance is easier to qualify for than a home equity loan. To qualify for a home equity loan, you need excellent credit and significant equity.

What are the disadvantages of an FHA cash out refinance?

An FHA cash out refinance can be a great way for homeowners to access the equity they've built up in their home. However, there are some disadvantages to consider before applying for this type of refinance.

One disadvantage is that borrowers will have to pay the upfront FHA mortgage insurance premium on a FHA cash out refinance. This can increase your monthly payment. In addition to the initial FHA funding fee, there is monthly mortgage insurance premium.

And unlike a conventional loan, the monthly mortgage insurance never goes away, regardless of the accumulated equity.

What are the alternatives to an FHA cash out refinance?

There are a few alternatives to an FHA cash out refinance. One option is to take out a personal loan to cover the costs of the refinance. Another option is a home equity loan or line of credit.

The benefit of a home equity loan or a line of credit is the overall simplicity of the transaction. Closing costs are minimized and there is no need to establish another escrow account. It's unlikely that mortgage insurance will be charged. The disadvantage are a more strenuous approval requirements.

Another disadvantage can be a higher interest rate and/or shorter loan term. A higher interest rate coupled with a shorter term will increase the monthly payment.

How much can I borrow with an FHA cash out refinance loan?

The maximum loan limit is derived from either your:

debt to income ratio,
the appraised value of your home or
the county FHA loan limits.

Conclusion

An FHA cash out refinance can be a great way for homeowners to get extra cash when they need it. This type of refinance allows borrowers to take out up to 80 percent of the home’s current value in cash. It’s a good option for homeowners who need money for home repairs, debt consolidation or other expenses.

Borrowers must have a minimum credit score of 580, and must have made at least 12 months of mortgage payments on time. They also must occupy the home as their primary residence.

SOURCE:
FHA Mortgagee Letter 2019-11
Section B. Maximum Mortgage Amounts on No Cash Out/cash out refinance Transactions