July 3, 2017
What is an FHA cash-out refinance loan? Simply put, FHA cash-out refinancing lets a borrower pay off the original mortgage and use the cash left over for any purpose acceptable to the lender. The new mortgage will be a standard term (15 or 30 years) and FHA cash-out refinance loans can refinance FHA-to-FHA, conventional-to-FHA, or any other non-FHA mortgage acceptable to the lender.
The definition of an FHA cash-out refinance loan as found in the FHA single family mortgage loan handbook, HUD 4000.1, states that cash-out refinancing can also be used to take equity out of the home where no mortgage currently exists. According to page 406 of HUD 4000.1:
“A Cash-Out Refinance is a refinance of any Mortgage or a withdrawal of equity where no Mortgage currently exists, in which the mortgage proceeds are not limited to specific purposes.”
Refinancing A Recently Purchased Home
Borrowers interested in FHA cash-out refinancing generally have to have owned the home for a minimum of 12 months according to FHA loan standards.
Refinancing An Inherited Home
FHA loan rules state that when refinancing an inherited home, “a Borrower is not required to occupy the Property for a minimum period of time before applying for a cash-out refinance, provided the Borrower has not treated the subject Property as an Investment Property at any point since inheritance of the Property”. Once the home is refinanced, the standard FHA occupancy requirement will apply.
Credit Check And Appraisal
Cash out refinances have a requirement for both a new credit check and appraisal. The new appraisal is required to issue the loan based on the current fair market value of the property. The new credit check insures that the borrower can afford the new loan regardless of the terms and conditions.
In other words, even if the borrower is getting a lower monthly payment as a result of the refinancing, for cash-out transactions the lender is still required to make sure the borrower can afford the new loan. Borrowers should approach FHA refinance loans the same way they did the original mortgage in terms of avoiding new credit applications leading up to your new loan, lowering the existing debt-to-income ratio, etc.
Payment History Requirements
HUD 4000.1 lists specific rules for FHA cash-out refinancing. “The Mortgagee must document that the Borrower has made all payments for all their Mortgages within the month due for the previous 12 months or since the Borrower obtained the Mortgages, whichever is less. Additionally, the payments for all Mortgages secured by the subject Property must have been paid within the month due for the month prior to mortgage Disbursement.”
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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