FHA Cash-Out Refinance Requirements | The bank rate
Your home is your most valuable asset, and if you’ve paid off a significant portion of your mortgage, it can also help you borrow more money for big expenses like paying for college or renovating your kitchen. One way to leverage the equity in your home is through an FHA refinance.
What is an FHA cash-out refinance?
An FHA cash-out refinance involves paying off your existing mortgage with a new, larger mortgage insured by the Federal Housing Administration (FHA). The largest loan amount is based on your level of equity, what you still owe on your current loan, and how much additional funds you need. Ideally, the new mortgage would also come with a lower interest rate.
How an FHA cash-out refinance works
Let’s say you currently owe $200,000 on your current mortgage and an appraisal shows your home is worth $400,000.
With an FHA cash-out refinance, you will be able to borrow up to $320,000, or 80% of the value of your property. In this case, $200,000 would be used to pay off your current mortgage.
However, you are not required to borrow the full $320,000. Let’s say you only need $100,000 to complete a major renovation on your home. You would go through a new mortgage application process – similar to the work you did for your first mortgage – for a $300,000 mortgage instead. Once approved, $200,000 of this amount will be used to pay off your old mortgage and you will begin making monthly payments on your new $300,000 loan.
There are Closing costs to consider (more on that below), so you’ll need to factor those in if you’re planning to roll those expenses into the new mortgage as well. It may also be necessary to establish a new escrow account.
FHA Cash Refinance Requirements
The FHA has minimum requirements for FHA loans, including refinances, but FHA lenders may also set their own standards in addition to these.
- Credit score: While FHA loans often make headlines for allowing credit scores as low as 500, the reality is that you’ll need a higher credit score to get the best deal on an FHA refinance. Some lenders will approve a credit score as low as 620, but the lowest rates will go to borrowers with a credit score of 740 or higher. If you’re hoping to do a cash-out refinance, work on improving your credit well before you apply.
- Debt to income ratio (DTI): In most cases, your DTI ratio cannot exceed 43%. If you have other loans or debts, it’s wise to try to repay them before applying for a refinance.
- Loan-to-value ratio (LTV): You will need at least 20% equity in your property after cash refinancing.
- Loan limits: There is a cap on how much you can borrow, regardless of the current value of your property. In most places the limit is $420,680 for a single family home, but some more expensive areas have a limit of $970,800.
- Mortgage insurance: All FHA loans, including cash refinances, require mortgage insurance. You will pay an initial premium of 1.75% of the loan amount, then an annual premium for the next 11 years that varies between 0.45% and 0.80% of the loan amount, depending on the term of your new mortgage. (While most FHA loans require mortgage insurance for the life of the loan, any loan with a 90% LTV ratio can remove it after 11 years.)
- Conditions of occupation and ownership: The house must be your primary residence and you must have lived in the property for at least the past 12 months. If you just moved in six months ago, you’ll have to hang in there before you think about a cash refinance.
- Payment status: You’ll need to be in good standing with your current mortgage, which means you’ve made at least the last 12 monthly payments on time.
How much money can you get with an FHA refinance?
The answer depends on a few factors, but there is one key piece of information that will dictate how much money you can get: the value of your property.
Let’s say you have $120,000 left on your mortgage and your home is worth $350,000. In this case, you could borrow up to $280,000 (80% of the value), use $120,000 to pay off your current loan, and you have $160,000 left. For an even more accurate estimate, factor in 4% for closing costs ($11,200) for a remaining $148,800.
FHA Collection Refinance Costs
An FHA cash-out refinance is not a free route to more money. You will have to pay the closing costs of the new loan, which generally range between 2 and 6% of the loan amount. So if you withdraw $250,000, those closing costs could be as low as $5,000 or as high as $15,000.
Your closing costs will include an upfront FHA Mortgage Insurance (MIP) premium of 1.75% of the loan amount (in the example above, that’s $4,375). There are also many other fees to consider, including fees from your lender and for services like an appraisal and title search.
FHA Refinance Rate
how you compare FHA cash-out refinance rates, pay attention to the annual percentage rate, or APR, which takes into account the fees you will pay. The APR offers a more accurate picture of the cost of a loan.
For example, you might see an interest rate of 4.375% for a 30-year FHA refinance, which seems like a good deal. The APR, however, could be higher than 5.3% due to mortgage insurance, discount points and other costs.
Advantages and Disadvantages of FHA Refinancing
Whenever you put your home at risk, it’s crucial to weigh the pros and cons.
The benefits of an FHA cash-out refinance include the ability to be approved with a lower credit score and the fact that borrowers with any type of existing mortgage — not just FHA loans — might be eligible.
Another benefit of having an FHA loan can come at a surprising time: when you’re ready to move. FHA loans are assumable, meaning another buyer who meets FHA credit qualification guidelines could take over the loan.
“That underlying FHA mortgage could be an advantage,” says Todd Johnson, senior vice president, director of Southeast Retail Mortgage Sales for Wells Fargo. “If interest rates are much higher than they are today, listing can market an assumable loan and potentially be easier to sell.”
The downsides, however, include you taking on more debt (likely with higher payments) and having to pay a range of other costs like MIP, appraisal fees and title services. Also, FHA cash-out refinances are only allowed on the home you live in — you can’t do this refinance on a rental or second home.
FHA Refinance vs. Conventional Refinance
An FHA cash-out refinance and a conventional cash-out refinance have the same goal: to get more money.
However, if you have the necessary credit for the conventional route, you can opt for this to avoid paying the MIP.
That’s a key consideration, Johnson says. Conventional mortgages with an LTV ratio of 80% will not require private mortgage insurance (different from FHA MIP).
However, this does not necessarily make a conventional loan cheaper. Johnson gives the example of a homeowner in Arizona with a 660 credit score who refinances a home worth $360,000. At the time, a 30-year fixed rate FHA was actually more affordable—an APR of 6.267% and a monthly payment of $1,854 that includes mortgage insurance—than a conventional 30-year fixed rate, which had an APR of 7.394% and a monthly payment of $1,940. Payment. (Property taxes and home insurance are excluded.)
Although rates and costs vary by state and change daily, this illustration is a reminder to consider a range of options with a large financial move like refinancing.
“It’s important that the client always engages in these conversations with lenders to make an informed choice about who will make the best decision for their personal situation,” says Johnson.
It’s also worth talking to your accountant or financial advisor, who can help you understand if refinancing will affect your ability to save.
FHA Cashing vs. FHA Refinancing Streamlining
If you don’t need to borrow more money with a withdrawal, a FHA’s streamlined refinance can be an easier way to try and save money on your monthly payments. As the name suggests, the process is simplified – less paperwork and less underwriting work required. There are also non-credit eligible options, which means you could be approved without any research on your credit score. However, FHA’s streamlined refinances are only available to existing FHA borrowers.
|Credit score required||Usually 620 (some lenders may accept less)||No credit documentation needed|
|Ability to withdraw more money||Yes||Nope|
|Available for borrowers with||Any type of existing mortgage (conventional, FHA, VA, or USDA)||Must have an existing FHA mortgage|
Alternatives to an FHA Cash Out Refinance
There are other options for borrowing money that don’t involve refinancing your home. Consider these alternatives to an FHA cash-out refinance:
- Home Equity Loan: Instead of taking out a whole new mortgage on your home, a home equity loan is a second mortgage. You can borrow a lump sum of money based on the equity in your home and you will repay the money in installments over a set period of time. Fixed rates can be just as competitive as mortgage rates, and some lenders won’t charge any closing costs.
- Home Equity Line of Credit (HELOC): A HELOC is very similar to a home equity loan, but it’s a line of credit, so you’ll borrow funds as you need them instead of taking out a large sum of money. Most HELOCs are variable-rate loans like credit cards, meaning your payment can fluctuate as rates go up or down, and they often come with annual fees whether you use them or not.
- Personal loan: A personal loan is another potential way to borrow money instead of cash out while refinancing your mortgage. The big advantages of personal loans include the ability to get the money fast (some lenders will get you the money the next business day) and lower credit score requirements for approval. There is a catch, however: many personal loans come with excessively high interest rates. Be sure to do the math before agreeing to an expensive deal.