February 14th, 2020 9:09 AM by Jackie A. Graves, President
FHA loans have been the hands-down choice for first timers for
quite some time. The Federal Housing Administration’s flagship mortgage program
only requires a down payment of just 3.5 percent of the sales price of the
home. At the same time, qualifying for an FHA from a credit standpoint is also
easier compared to other low down payment loan options. Low down payment and
easier qualifying is an excellent combination for those saving up to buy their
very first home.
At some point however, homeowners could consider refinancing an
existing mortgage. Maybe rates have fallen lower than the rate currently on the
note. That’s typically the most common reason refinancing can make sense but
there are other reasons. Changing loan terms can also be a valid reason to
refinance. Different loan terms simply means shortening or lengthening the life
of the loan. A 30 year term will have lower payments than say a 10 year loan,
On the flip side, a longer loan term means more interest is paid
over the life of the loan. A shorter loan term will mean higher monthly
payments over the course of the loan, but the amount of interest paid is
significantly less. But once a decision has been made to refinance, there may
also be an option to pull out cash as part of the transaction. This is an FHA
cash out refinance.
There have been some changes to the FHA refinance program when
pulling out cash occurs. These changes implemented late last year changed the
limit on how high the new cash out loan can be compared to the current market
of the property. The maximum cash out limit is now 80 percent of the value of
the property compared to 85 percent previously.
Other FHA guidelines for a cash out loan include a minimum
credit score of 580 when the loan amount is less than 90 percent of the value
of the property but can go as low as 500 when there is more equity in the home.
With a cash out refinance, there will be a limit at 80 percent. An FHA cash out
loan is also fully documented, just as it was when using an FHA loan to
purchase and finance a home.
Existing FHA loans may also be eligible for a “streamline”
refinance which simply means less documentation is required for an approval.
With a cash out FHA loan, there is no such option. Other requirements include
verifying there have been zero payments made within the last 12 months more
than 30 days past the due date. Owner occupancy is also still required. This
requirement can be fulfilled by providing a copy of utility bills going back at
least 12 months. You’ll need to speak with your individual lender how to comply
with this FHA guideline.
Finally, remember that pulling cash out of a property reduces
the amount of equity in your home. With an FHA cash out loan, this is partially
addressed by limiting how high the loan can be compared to the current market
value of the property. Pulling cash out during an FHA refinance should only be
a secondary consideration, not a primary one. If converting equity into cash is
the primary focus, a home equity loan is probably the better answer.
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