FHA cash-out-refinancing – Guidelines for getting an approval easily

Profile Picture
By: tiarajoseph11
on 12th Aug,2015

FHA cash-out refinance, FHA loans, refinancing
fha-cash-out-refinancing

Since 1934, The Federal Housing Administration (FHA) has maintained its services to adjust the variable needs of borrowers. FHA helped many people to buy affordable and good quality homes through its FHA-insured loans. FHA loan is very much affordable to the common mass. It is because the credit guidelines of FHA are much more lenient than any other conventional loans. FHA allows its borrowers to avail refinance schemes which can reduce their interest rates and monthly installments. They can also use cash out option for personal reasons.

Consideration made by FHA

Because of the housing downfall of 2007, the conventional lenders were bound to maintain tight requirements and strict guidelines regarding home loans. FHA itself allowed 95% LTV ratio for a cash-out refinance loan, till April 2009. But due to the housing turbulence in 2007, FHA was compelled to modify the whole criteria for preserving its program. So, after 1st April, 2009, LTV ratio for cash-out-refinance is limited to maximum 85%.

Requirements for Cash-out-refinancing loan

  1. Borrower’s Requirement – Before applying for an FHA cash-out-loan, the borrower must ensure that the house must be occupied by him. It must not be used for investment. You, the borrower must own the house for at least twelve months, by this way you can use the new appraised value of the property. You must also be regular on your monthly payments for at least 12 months. Make sure you must not exceed 30 days regarding late payments. After adding the new monthly payment (with the increased loan amount) in your total monthly debts, make sure it should fit within your debt-to-income ratio. Your monthly housing debts, consist of loan principal, monthly interest, property taxes, homeowner's insurance, PMI, etc., should not cross the limit of 29% of your total gross monthly income.
  2. Credit Requirements – Previously, the FHA doesn't require a credit history for approving refinance loans. But due to the 2007 market downfall, many changes have been made in the eligibility criteria. From July 2010 onwards, FHA will only approve any loan application which is higher than a credit score of 500. If your credit score is less than 580, and you are applying for an FHA purchase loan, then you have to put down 10% of the loan amount as down payment. Some instances, FHA-approved lenders may impose their own credit criteria while selling these loans. They can sometimes ask for a credit score of 640 or above. So, before sending an application, have a chat with your lender or broker to check the minimum score required to avail an FHA cash-out refinance loan.

How to use FHA cash-out-refinance loan

A cash-out refinance loan is very useful as a new loan which can cover your existing mortgage and closing costs. Apart from that expense, it also generates an extra source of amount for personal use. The amount is equivalent to 85% of your newly appraised value and it can be used for any purpose. But beware, if you have a higher debt ratio, you should pick a strategy which can consolidate your debt using the cash-out refinance option.

After opting for a cash-out refinance, your current DTI will be recalculated. A new mortgage payment will be added to your debts, so you need to pay off few other debts to balance your DTI at 41%. Before starting the loan process, you must discuss these issues with your lender. You may need to submit your personal bank details so that the debt amount can be promptly paid off from the cash proceeds you will be getting from the new FHA cash-out-refinance loan.

Warnings

Before any consideration, that you will be using FHA cash-out refinance or not, keep in mind that you must also consider PMI in two separate ways. First, you have to pay 2.23% of the loan amount upfront as a mortgage insurance premium. This amount will be rolled into a new loan balance. Second, you need to continue the monthly PMI premium, which needs to be calculated at a 0.55% for 30 year mortgage. If you multiply the loan amount with that percentage and divide it with 12, you will have the exact monthly amount. When the LTV ratio reaches 78%, the PMI premiums will come off. But the payments must be carried out till last 5 years without any fail.

PMI will not be required on 15 year mortgage loans which has LTV ratio below 90%. Don’t forget to pull your credit reports to get a clear view of your credibility. It may cost you very little per report, but it will also be helpful to check all errors, duplications/outdated information. Take prompt action to rectify the errors. The credit bureaus may take more or less 30 days to fix your credit report disputes.

Check out FAQ on cash-out refinance.

0
No votes yet


Page loaded in 3.816 seconds.