FHA Cash-out Refinance And LTV Credit Scores
Compared to the conventional cash-out refinance loans, the FHA cash-out loans usually have more relaxed guidelines, which allow the borrowers with even low credit scores as well as high debt-to-income ratio easily qualify for the loans.
At least a 500 credit score is required for an FHA loan, assuming the down payment of about 10%. The FHA cash-out refinance requires about 15% (similar to the 15% down payment). Therefore, in theory, one needs roughly a credit score of about 500 to qualify.
But, most of the lenders usually require a way higher credit score as the cash-out financing usually is more carefully allotted than a house purchase. That is why you will probably need a minimum score of somewhere between 600 and 660 in order to qualify for the FHA cash out.
The FHA cash-out has a maximum loan-to-value of about 85% of your house’s present value (of course some new appraisal is necessary). You may compare it with the conventional cash-out LTV which is about 80%. The greater upper limit is one of the chief reasons why most of the homeowners choose the FHA in place of the conventional loans. Given below is an appropriate example:
- The current value: $250,000.
- The existing loan: $187,500.
- The maximum conventional cash-out loan will be about $200,000 (which is around $10,000 cash for the homeowner after he pays off his existing loan as well as the closing costs).
- The maximum FHA cash-out loan will be about $212,500 (around $21,000 to the homeowner after his loan pay off and the closing costs).
The left $11,000 in the particular case may be enough to let the homeowner choose FHA cash-out.
Comparing Conventional Cash Out with FHA Cash Out Refinances
An FHA cash-out loan has its advantages as well as its disadvantages. All the FHA loans need both the upfront insurance premium of the mortgage as well as an insurance premium to be paid monthly. Here the upfront mortgage insurance premium is around 1.75% of your total loan amount. So for a $200,000 loan, there is about $3,500 in the additional principal which is tacked onto the loan amount.
Plus, FHA loans also require the monthly mortgages which would be about 0.80% of the total loan amount every year on the loan with around 85% loan-to-value or LTV. That is about $67 every month for $100,000 borrowed. Plus, the monthly mortgage insurance is also payable now for around 11 years instead of 5 years; post the FHA mortgage insurance alterations which were implemented on 3rd June, 2013.
For all the extra costs, one might consider the conventional cash-out refinance in case his/ her home has ample equity since the conventional loans which are less than 80% loan-to-value or LTV do not need the upfront or the monthly mortgage insurance of any sort.
The FHA Cash Out Refinance Guidelines and Rules
To avail a loan under the FHA cash-out refinance, the requirement of an adequate income is paramount. In order to verify their income, borrowers will have to produce two of the latest pay-check proofs that show year to date and current earnings from their employers, along with W2 forms and two latest documents of the income tax returns.
As no funds are required to end a transaction, investment and bank statements do not require asset verification when one is availing FHA cash out refinance loan. But, the FHA lender can ask for a bank statement of the assets, which can form a part of the written guidelines between the two parties.
An appraisal report is required by the FHA lender to evaluate the maximum amount of loan that can be given to the borrower. If the property has been purchased a year ago by the borrower, the loan amount that is given is 85 percent of the value of the house. Also, the loan limit should not go beyond the FHA’s county to county limitations.
500 is the lowest credit score that is needed to avail an FHA loan. For cash-out loans, the FHA does not have a credit score that they have to maintain, but lenders often ask for a credit score that is higher than 500. The average credit score for FHA cash-out refinances ranges from 620 to 680. The lender will then see whether the FICO is high enough or not.
There are chiefly two kinds of primary FHA programs of refinance loan; firstly the streamline refinance loan and secondly the more famous FHA cash out refinance. The former, that is, the streamline refinance loan program usually refinances the mortgage at quite a low rate with very little documentation. However, it doesn’t really allow any sort of cash to the particular borrower.
The second kind that is the FHA cash out loan usually provides handsome in hand cash to the given borrower. You might open the loan with quite a huge balance than the amount you presently owe, as well as the excess would go to you. Since this is quite a riskier service for most of the lenders, this FHA cash out loan usually requires way more documentation and papers than does the FHA streamline.
Benefits of an FHA Cash Out Refinance
Just like the name is implying, the greatest boon of the FHA cash out loan or refinance is just to put the extra cash into the particular borrower’s pocket. The funds might be utilized for several purposes like the following:
- For your home improvement.
- For the educational costs.
- For buying yourself a new vehicle or for paying off the car loan that you have.
- For consolidating your credit card amounts.
- For creating any kind cash cushion for your personal use or for investing.
For instance, if you are owing $100,000 on the house, you might open the FHA cash out loan easily for around $150,000, provided your house has ample equity and you can qualify for your loan. If the closing costs are about $5,000, you might have some extra cash of about $45,000 with you.
Secondary to getting cash out, such loans might also be utilized to simultaneously decrease the rate or/ and change your loan term, that is from around 30 years to about a 15 year. You might even alter the adjustable rate mortgage for some steady fixed rate for the life of the loan.’
Requirements For FHA Cash Out
The Occupancy. The FHA cash out loans are usually for the owner-occupied estates or properties only. These are not to be used for any kind of rental properties.
The History of the Mortgage Payment. In order to qualify for the FHA cash out, one must not have over one payment which had been more than a month late during the past 12 months or so The current existing mortgage surely should be about six months old or more and must have some verified way of the payment history, which is often decided by the credit report of the borrower.
The Length of the ownership of your home In case you have resided in the house less than even a year, then this FHA lender can use the lower appraised value or your original purchase price of your house for determining the maximum amount for the loan that you can get. For instance, if you have purchased the house less than even one year ago for a sum of say $250,000 and now it appraises for about $270,000, and then the maximum loan amount you may get will be approximately $212,500 which is about 85% of the $250,000.
The Affordability. FHA cash out loans usually require the borrowers to meet the existing debts to their income ratio rules and guidelines. At the most, the FHA debt ratio guidelines would be 29 and 41, however, they might be greater in certain cases. The initial ratio, 29, is housing ratio which is calculated as a result of dividing the entire housing payment by the gross income of a month. Housing payments include the principal and the interest, the taxes, the insurance, the mortgage insurance premium monthly as well as any of the homeowner association fees. For instance, if your housing payment roughly is $2,000 and the monthly income is somewhere around $7,000, then the housing debt ratio would be 28.5%.
The overall debt ratio limit has to be 41 which will include housing payment, plus the monthly credit obligations. The additional credit obligations would include the credit card payments, the automobile or the student loans as well as the installment debts of all sorts. The other qualifying factors include the spousal or the child support payments. The number, however, does not include the utilities, the car insurance, or any other kind of non-debt payments.
A borrower having an income of about $7,000 per month may have the house payment of as much as $2,030 every month and the monthly credit limits of as much as $840 every month.
The Co-borrowers. The co-borrowers who are nonoccupants are usually allowed on the FHA cash out loan as long as these co-borrowers who are non-occupant are on their original note. They might not be adjoined to this loan application for helping the chief borrower to qualify.
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The Federal Housing Administration (FHA) has been helping home buyers to purchase properties with the help of affordable loans since 1934. Special features of FHA loans include low down payments and reasonable interest rates. Refinancing mortgages is a part of the FHA program which helps homeowners to convert to lower mortgage interest rates and monthly payments along with cashout options.
FHA refinancing consists of two programs- FHA streamline refinance and FHA cash out refinance. The first category provides refinancing to the borrower at a lower interest rate than the existing mortgage and requires less documentation. However, no cash is provided to the borrower.
The FHA Cashout Refinance program allows the borrower to acquire a bigger loan and receive the home equity as cash. This program involves more risk for the lenders which is why it requires more documentation.
Mortgage ADV provides an overview of the guidelines, eligibility, and requirements of the FHA Cashout Refinance Loan:
How does the FHA Cashout Refinance process work?
Under the FHA Cashout program, the maximum loan-to-value that you can cash out is 85 percent of the current market value of your home. For example, if the present value of the home is $250,000 and the remaining loan amount that is due is $185,000, the maximum cashout that you can get is $212,500 and the home equity that is provided as cash is around $23,000 after deducting the closing costs.
FHA Cashout Refinance vs. Conventional Cashout Refinance
Opting for FHA Cashout is a better option because it offers higher cashout than conventional refinancing. As opposed to the 85 percent cashout facility that FHA refinancing offers, a conventional cashout covers 80 percent of the property value. The extra cash that you get from the FHA cashout program can be utilized for other expenses.
Borrower’s Eligibility Criteria
The following criteria must be met in order to become eligible for an FHA cash out refinance loan:
- The title of the property must be in your possession before applying for refinancing.
- Your existing mortgage document must mention your status as a US citizen.
- You need to validate your social security number by submitting any relevant proof like pay stubs, social security card, W2 form or tax receipts.
- Foreign nationals, non-profit organizations or corporations, land trusts and government-related agencies are not eligible to apply for the loan.
FHA Cashout Refinance Guidelines
- Credit Score- The minimum credit score requirement for an FHA loan is 500 but for the cashout refinancing option, a score of 580 is the minimum requirement. Individual lenders have their own credit score specifications which you need to check before applying. Generally, a credit score in the range of 620 to 680 is required for a loan refinance application to get approved by FHA-insured lenders. The reason is that the risk level is higher for the lender in this case.
- Maximum LTV- The maximum loan-to-value that the FHA cash out refinance offers is 85 percent of the market value of the home. The LTV ratio is measured by dividing the amount of loan requested with the value of the property as mentioned in the appraisal report. Then the percentage is determined by the lender.
The FHA has set certain regulations related to the debt-to-income ratio in order to prevent borrowers from committing to mortgage agreements which they cannot pay. The ratio is calculated in two ways:
- a) The total mortgage payment is divided by your income. Mortgage includes the principal amount, interest to be paid, taxes, escrow, mortgage insurance premium, hazard insurance and homeowner’s association charges and a few other costs. This amount is divided by your gross monthly income. The maximum debt to income ratio is 29 percent.
- b) The second method includes credit obligations as well. For calculating the debt to income ratio, the total mortgage payment and monthly recurring expenses are divided by the gross monthly income. The total debt includes loan principal, interest to be paid, mortgage insurance premium, tax payments, escrow, homeowner’s association fees, hazard insurance, credit cards, education loans, personal loans and automobile loans. The debt to income ratio should not exceed 41 percent.
- Payment History- Your credit history should show that all monthly payments for the last twelve months have been cleared. You need to make mortgage payments for at least 6 months for the property before applying for a refinance cash out loan. In case the mortgage is not listed in your credit report, you need to acquire a verification of mortgage or any other evidence like bank statements which can prove that you have made mortgage payments in due time for the last one year or during the mortgage period, whichever is less. If your property is free of debt, it is immediately eligible for a cashout refinance.
- Income Requirements- The FHA cash out refinance requires you to give evidence of sufficient income in order to be qualified for the loan. You need to verify your income by submitting documents like recent pay stubs which show the monthly and yearly earnings, the previous tax returns for two financial years and W2 forms from the last two years in some instances. If you are self-employed, you need to have at least 25 percent or greater interest in the business. Your self-employment income is only considered if you have been in business for a minimum period of 2 years.
- Assets- Generally, you do not need to provide investment and bank statements to verify your assets to the FHA-insured lender because the cashout loan does not require funds for closing the transaction. However, the FHA lender may ask for a bank statement if it is a part of their underwriting guidelines.
You need to submit a new appraisal report to the lender with your application for an FHA cashout loan so that he can get an accurate idea as to the current market value of your home. This value determines the amount of loan that you can expect to get from the lender. There are different loan limits according to the county where your home is located. The maximum loan limit of 85 percent can be obtained if the home purchase dates back more than a year and if the amount does not exceed the county limit.
The property with which the mortgage is related and for which you want refinancing needs to be owned and occupied by you. It needs to be your primary residence and it cannot be a rental property. If you have leased out the property on rent, you cannot qualify for cashout till you occupy the property yourself. The length of ownership is also taken into consideration. If you have owned the home for less than a year, the lender takes into account the lower value of the appraisal range or the original purchase value of the home. The loan-to-value ratio is calculated accordingly.
Specifications of FHA Cashout Refinance Loans with Mortgage ADV
- An important point to keep in mind is that the FHA cashout loan requires you to pay an upfront mortgage insurance premium as well as a monthly insurance premium. The rate of the upfront premium is 1.75 percent of the final loan amount and the monthly premium is 0.8 percent of the loan when 85 percent loan-to-value is offered by the lender.
- In order to qualify for the FHA refinance loan, the lender checks whether you are getting any tangible benefit from taking a cashout or not. The factor which determines your gain is the interest rate. The new interest rate for the refinance loan needs to be lower than the rate for your existing mortgage. There is no specific requirement regarding the difference between the two rates. The new loan should lead to a reduction in the monthly payments, loan term, and rate.
- You can refinance a conventional loan and convert it into an FHA loan but you need to consider the costs involved in doing so. You receive 85 percent cashout but you need to pay the mortgage insurance premium and closing costs.
- The mortgage payments in the past twelve months should not be more than 30 days past the due date otherwise they are considered late. You cannot qualify for a cashout loan if even a single payment is late in the past year.
- You can consolidate your existing mortgages into a single loan and at significantly lower interest rates by opting for an FHA cashout plan. The replacement loan is much more easy to pay and you can utilize your home equity to carry out home renovations, pay medical bills and your child’s college tuition or meet unexpected expenses. The money can be invested to create a contingency fund or start a new business.
- You can apply for an FHA cashout loan even if you have filed for bankruptcy. If two years have elapsed from the discharge date of bankruptcy, you are qualified for the cashout. However, your credit score should be good and there should not be any new credit obligations. If the two year period is not yet over, you need to give evidence that the bankruptcy was caused by circumstances out of your control and since then you have handled your financial affairs responsibly.
- You may add co-borrowers but they need to be occupants of the subject property and it should be their primary residence. The co-borrower can be someone other than your spouse as well. However, the original borrower, as well as co-borrower, need to be on title for at least a six month period. Additionally, the first borrower needs to be on the mortgage and original note. Non-occupying co-borrowers can also be added but only on the condition that they have been listed as non-occupant co-borrowers on the title and mortgage since the first mortgage. To prove this the copy of the original mortgage note and the purchase HUD-1 need to be submitted.
- The US government provides a guarantee for the FHA cash out refinance so you can get a loan even with a low credit score in some cases. The guidelines for underwriting are also more flexible in case of FHA cashout loans. You can qualify with a lower income as well after seeking approval from the lender.
This brings our overview on FHA Cashout Refinance Loans with Mortgage ADV to an end. Thank you for using Mortgage ADV. For more information on FHA Cashout procedure, you can get in touch with us.