What Is FHA Cash Out Refinance?
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What is an FHA Cash Out Refinance?
There are two primary FHA refinance loan programs; the streamline refinance and the FHA cash out refinance. The FHA streamline refinance program refinances a mortgage to a lower rate with little documentation. But it doesn’t allow for any cash to the borrower.
The FHA cash out loan provides cash-in-hand to the borrower. You open a loan with a bigger balance than what you currently owe, and the excess proceeds go to you. Because it’s a riskier product for lenders, the FHA cash out loan requires more documentation than does an FHA streamline.
Check today’s FHA cash out rates here.
Benefits of an FHA Cash Out Refinance
As the name implies, the greatest benefit of an FHA cash out refinance is to put extra cash in the borrower’s pocket. These funds can be used for any purpose such as:
For example, if you owe $100,000 on your home you could open an FHA cash out loan for $150,000, assuming your home has adequate equity and you qualify for the loan. If closing costs were $5,000, you could end up with an extra $45,000 in your pocket.
Click here for today’s FHA cash out rates.
Secondary to receiving cash out, these loans may be used to simultaneously lower the rate and/or change the loan term, i.e. from a 30 year fixed to a 15 year. You could even change an adjustable rate mortgage to a steady fixed rate loan.
FHA Cash Out Refinance Credit Scores And LTV
Compared to conventional cash out loans, FHA cash out loans have relaxed guidelines, allowing borrowers with lower credit scores and higher debt-to-income ratios to qualify.
The minimum credit score for FHA loans is 500, assuming a 10% down payment. FHA cash out refinances require 15% (the same as a 15% down payment). So, in theory, you need a 500 credit score to qualify.
However, most lenders will require a much higher credit score since cash out financing is more carefully approved than even a home purchase. So, you’ll probably need a minimum score between 600 and 660 to qualify for FHA cash out.
FHA cash out maximum loan-to-value is 85% of the home’s current value (a new appraisal is required). Compare that with a maximum conventional cash out LTV of 80%. The higher limit is why many homeowners choose FHA instead of conventional. Here’s an example:
The extra $11,000 in this case might be enough to make the homeowner choose the FHA cash out option.
Compare Conventional Cash Out and FHA Cash Out Refinances
FHA cash out loans also have their disadvantages. All FHA loans require both an upfront mortgage insurance premium and a monthly insurance premium. The upfront mortgage insurance premium is 1.75% of the loan amount. For a $200,000 loan, that’s $3,500 in additional principal tacked onto your loan amount.
Additionally, FHA requires monthly mortgage which would be 0.80% of the loan amount per year on a loan with an 85% loan-to-value. That’s $67 per month for every $100,000 borrowed. Also, this monthly mortgage insurance is now payable for 11 years rather than a mimumum of 5 years, after FHA mortgage insurance changes implemented on June 3, 2013.
Because of these extra costs, you should consider a conventional cash out refinance if your home has significant equity, as conventional loans at or below 80% loan-to-value do not require upfront or monthly mortgage insurance.
See entire article on mymortgageinsider.com