As a homeowner, the FHA cash-out refinance offers the opportunity to pay off your existing mortgage by applying for a bigger loan. The amount from this extra cash depends on the equity that has been gathered in your home value. The FHA cash-out refinancing may be beneficial for you if you are starting a business, consolidating high-interest debt, funding a home renovation project, etc. If you are considering borrowing from your home equity, find out what you can borrow with a cash-out refinance calculator.
Who May Qualify for FHA Cash-Out Refinancing?
The cash-out refinance loan from FHA requires more documentation from its applicants because lenders consider it a riskier product. Applying for the FHA cash-out loan is similar to applying for an FHA loan the first time. If your financial profile does not have any significant changes, then you are likely to be eligible for the FHA cash-out refinance. In general, the basic requirements for a borrower are:
- A valid Social Security number
- The property must be appraised
- The borrower must be a primary resident of the property
- Steady employment history
- Of legal age to sign a mortgage loan within your state
- A lawful residence in the country
FHA Cash-out Refinancing Guidelines
Payment history requirements
As a borrower, you need to provide documentation that you made each monthly payment for the past a year or the time when you obtained your loan. Before you can apply for a refinance, you must have given payments for a minimum of 6 months to your mortgaged properties. If your current home is clear and free of mortgage, you may be able to refinance it as a cash-out transaction.
In general, the FHA cash-out refinancing has a maximum of 80% loan-to-value of the current home value. You calculate this loan-to-value ratio by dividing the amount of loan with the value of the property after appraisal.
There are guidelines to follow from the FHA regarding the debt-to-income ratio of an applicant to keep borrowers from entering into another mortgage transaction that they cannot afford. Because of this, you should pay off some of your debts to keep a low ratio. Consider using two different calculations, which are Total Fixed Payment to Effective Income and Mortgage Payment Expense to Effective Income.
You need to have a minimum of 580 credit score to be eligible for the FHA cash-out refinancing. But, most FHA lenders that are insured set their limits higher to a minimum score of 600 to 620, considering that cash-out loan is more meticulously approved than a home purchase. Some companies ask for at least a single credit score for eligible borrowers.
Advantages of FHA Cash-Out Refinancing
You can use your equity for any purpose. This flexibility allows you to use the money you take out from debt consolidation to kitchen upgrade. You also do not need to qualify for an FHA loan for this. You can still apply and be eligible for a cash-out loan even if you have a traditional mortgage. Also, the credit requirements are lenient, as you do not need a high credit score to obtain approval for the FHA cash-out refinance.