When you refinance a Federal Housing Administration (FHA) loan, you can reduce the amount of your mortgage, as well as your monthly payments. If you build up enough equity with your house, you can also take home cash, which you could use for renovation, emergencies, or that long-delayed vacation.
The FHA cash out refinancing refers to the mortgage that is guaranteed by the FHA. In essence, you can replace your existing loan with a more favorable one. Some people are still wary of mortgage refinancing. The financial crisis of 2008 may still be fresh in their minds, as it buried millions of Americans in debt. In recent years, analysts have noted a spike in the number of homeowners who applied for cash-out refinancing.
However, several factors should give them peace of mind. There would be no way to experience a repeat of what happened in the financial crunch. For one, the government has instituted several fail-safe measures to prevent that from occurring again. Second, the increase in FHA cash-out refinancing applications are tied to two things:
- Interest rates
- The appreciation of the house value (increasing from six to eight percent in recent years)
How Much Can You Get in Cash?
The answer depends on several factors. However, the Housing and Urban Development has set a ceiling on how much you can borrow. For instance, the maximum allowable LTV or loan-to-value is equivalent to 80% of the current value of your home. It would be best if you got your house appraised again. It is one of the highest limits when you compare the FHA with conventional loans.
If you are a homeowner, it is best to look at your options. For instance, if you can get better terms than your existing mortgage through a cash-out refinancing, then it does not hurt to explore this option, even without the cash.
However, if you need cash right now for a medical emergency, home improvement, or repair, then the FHA cash-out refinancing might be the answer to your problems.
How to Know if You are Eligible?
There are minimum eligibility requirements before you can apply for the FHA cash-out loan refinance.
Here are some of the requirements:
- You should have a credit score of 580 or higher.
- The loan-to-value of your house must at least be 75%.
- The property must be named after you.
- Your debt-to-income ratio must not exceed 41% to 50% (depending on the lender).
- Your mortgage payments must be up to date (meaning you do not have any late payments for the last six months).
- You must not have a late payment of more than one month for the previous 12 months.
You need to provide the lender with proof that the property is your primary residence. Among the documents you will present are utility bills, bank statements, among others. The FHA’s minimum credit score requirement is 580. However, you can bring this down to 500 if you have at least a 10% equity in your home. Ultimately, it is still up to the lender whether or not to follow the FHA requirement on the credit score. The move is understandable since they will assume all the risks.