Qualifying for an FHA cash-out refinance loan is much the same as qualifying for an FHA “forward mortgage” or typical new purchase loan. Since this type of refinancing involves money back to the borrower, the lender is required to run a new credit check and the usual credit requirements will apply even for those who are repeat customers for a particular lender.
When you are preparing for your FHA cash out refinance loan, you’ll need to observe the same rules about credit that you did when you applied for your original mortgage. That means avoiding new credit card applications and other types of credit leading up to your refi loan paperwork. Why?
Every time you apply for new credit, a “hard inquiry” is listed on your credit report. These inquiries affect your credit score, and in the eyes of the lender any credit applications made at or near the same time you apply for the refinance loan make you a bigger credit risk. Understanding how the lender views your credit activity is a major part of knowing how FHA loan approval/denial choices are made.
Debt To Income Ratio
Just like with your original loan, the lender is charged with making sure you can afford this new loan. Has your debt to income ratio gone up since your original FHA loan application? Start preparing a year in advance of your FHA cash-out refinance loan to reduce debt and change the balance of your debt-to-income ratio. This will make it easier for the loan officer to justify approving your loan.
Remember that some types of debt may be handled differently than others. For example, deferred student loan obligations may require the lender to calculate a monthly financial obligation based on a percentage of the balance. Other types of financial obligations such as alimony or child support may require you to submit documentation to show the official amount you are committed to each month.
Age Of Your Current Mortgage
FHA cash-out refinance loans have an “age requirement”. The borrower must have owned and occupied the property for a minimum amount of time, which according to the FHA loan Handbook, HUD 4000.1 is as follows:
“The Property securing the cash-out refinance must have been owned and occupied by the Borrower as their Principal Residence for the 12 months prior to the date of case number assignment.”
Talk to your loan officer to learn more about FHA refinance loan requirements.