November 14, 2017
Alert: 7 Updates To FHA Cash-Out Refinance Guidelines For 2017
What Is A FHA Cash-Out Refinance?
A FHA Cash-Out refinance is a government sponsored home refinance program. Seven updates to FHA cash-out refinance guidelines for 2017. NSH Mortgage has the wisdom and tools that can help you save money with FHA cash-out refinance.
FHA Cash-Out refinances allows a homeowner to turn home equity into cash by taking out a larger loan than what they currently owe. The homeowner receives the difference in cash. FHA is one of the most popular home buying programs on the planet. But not everyone knows FHA also offers three refinance types
Of the three, the FHA Cash-Out loan is the only option that allows cash back to the homeowner. Considering, the latest updates to FHA Cash-Out refinance we are going to review how these new updates will affect you and the marketplace, regarding the three options above.
Why Use A FHA Cash-Out Loan?
FHA loan guidelines are flexible, and is making it so that more homeowners can use the cash-out option. Conventional refinance loans offer cash-out as well. But the homeowner must have higher credit scores and more equity in the home.
With a FHA Cash-Out, you can pay off any loan type, plus take equity out of your home as a check, or have it wired to an account of your choice. You can use those funds for any purpose:
- Home improvement projects.
- Credit card consolidation.
- Auto loan payoff.
- Student loan refinancing.
- Prepay college tuition.
- Consolidate a first and second mortgage.
- Pay off personal debts.
There is almost no limit to what you can use the money for. Homeowners who want to reduce monthly payments, or just have a little extra cash in the bank, should examine this loan type.
How Do FHA Cash-Out Refinances Work?
With a cash-out refinance, you open a new FHA loan to replace an existing loan. Unlike the FHA streamline, you do not have to refinance an existing FHA loan. You could have a subprime, Alt-A, conventional, ARM, or another loan type, and replace it with new FHA financing.
In addition, you can turn your home equity into spendable cash. Many homeowners do not know that FHA can be a cash generating tool, but it can. Here is how it works:
Current Value $200,000
New FHA Loan (max 85% of value) $170,000
Current Loan -$140,000
Closing Costs -$3,000
Conventional Cash-Out Versus FHA Cash-Out: LTV And Credit Score
The primary disadvantage to a FHA Cash-Out loan is the associated mortgage insurance. FHA loans require an upfront and monthly mortgage insurance premium (MIP). These fees are as follow:
- 1.75% of the new loan amount upfront (wrapped into the loan amount).
- 0.80% of the loan amount yearly, paid in 12 installments with the mortgage payment.
This is equal to $1,750 upfront and $67 monthly for each $100,000 borrowed. In return for the extra fees, FHA provides more credit score flexibility and a higher maximum loan to value (LTV) than do conventional loans. Conventional Cash-Out Refinances do not come with upfront or monthly mortgage insurance. Also, conventional cash-out can be used for second homes and investment properties. FHA must be used on the home you live in.
|Conventional Cash-Out||FHA Cash-Out|
|Minimum Credit Score||620 (official), 640-680 (likely)||500 (official), 600-660 (likely)|
|Can replace any loan||Yes||Yes|
|Occupancy||Owner, Second home, rental||Owner occupied only|
FHA Cash-Out On Homes Owned Less Than One Year
If the mortgage has been open for at least 12 months, the last year of mortgage payments must have been made on time. If less than a year, the homeowner must have made at least six payments on their current mortgage.
For instance, you purchased your home in February. Your first payment is in April. You must make on time April through September payments before being eligible for a cash-out loan. That rule applies whether you have a FHA loan currently or not.
If you have owned your home less than 12 months, you might want to wait to apply. For properties owned less than one year, the maximum FHA mortgage is equal to the lesser of:
- The current appraised value.
- The original purchase price.
For instance, you purchased your home 11 months ago for $250,000. The home is now worth $275,000. The lender will use a value of $250,000 unless you apply after 12 months have passed since the purchase. If you wait one year after purchase, the maximum new loan amount is 85% of the current appraisal value.
FHA Cash-Out Mortgage Rates
FHA rates are low, even lower than conventional loan rates. In fact, according to loan software company Ellie Mae, FHA rates average about 10 to 15 basis points (.10% – .15%) below conventional rates. This is due to FHA’s strong government backing. Lenders can issue these loans at lower risk.
However, consider FHA mortgage insurance, which raises the effective FHA rates as follow:
FHA Cash-Out Refinance Guidelines
Below are the current FHA Cash-Out refinance guidelines including credit score requirements, LTV maximums, and more.
The official credit score minimum for all FHA loans is 500. However, a realistic minimum that lenders will actually allow is somewhere between 600 and 660 or higher. In addition, you must have paid all mortgage payments on time for the previous 12 months, or at least six months if you have owned the home less than a year.
If you were late on a payment, verify it showed up on your credit report. Credit bureaus typically do not report late payments until they are at least 30 days late.
Loan To Value (LTV)
As stated above, the maximum LTV for FHA Cash-Out refinances is 85%, unless the property has been owned less than one year. In that case, the maximum new loan amount is the lesser of the new value or original purchase price.
Income And DTI
Adequate income is required to make the monthly payments for the new loan. Current FHA affordability is determined by debt to income (DTI) ratios. Simply, that is the ratio between your income and monthly debt payments.
For instance, if you make $4,000 per month and have a debt payment equal to $1,000 per month, your DTI is 25%. FHA loans require a DTI of no more than 41%, including your future home payment and all debt payments like credit cards, auto loans, and student loans.
You may not add any borrower to the loan who does not live in the home. These are known as non-occupant co-borrowers, and are not allowed for cash-out loans.
Generally, you cannot add a second mortgage to the FHA Cash-Out loan unless both loans add up to 85% of the home’s value or less. However, you may be able to keep an existing second mortgage and subordinate it under the new FHA loan. For instance, subordinating will involve receiving a document from the second mortgage lender stating its loan is in lower priority than the new FHA loan.
In most areas of the country, the maximum FHA loan limit is $275,665 for 2017. However, maximum loan amounts go up to $636,150 in places like Los Angeles, California, and New York, New York.
Check Your FHA Loan Eligibility
FHA loan rates are low, leading to more homeowner eligibility for this program. Lenders are loosening standards, and are eager for FHA Cash-Out business. Homeowners can get competing quotes and go with the rate that works best for them. Get a FHA loan quote now, which includes an eligibility check and comes with no obligation if you are not satisfied with your rate.