What is the difference between FHA Cash-Out and No Cash-Out refinance loans? Aside from the obvious cash out option, there are several important differences in these two types of FHA refinance loans you should know about before you decide which one is right for you.
FHA Refinance Loan Occupancy Requirements
FHA loans generally require at least one borrower obligated on the loan to occupy the property as the primary residence as a condition of loan approval. But beyond that, cash-out refinance loans and FHA no cash-out refi loans have some other occupancy rules you should know.
For FHA Cash-Out refinancing, HUD 4000.1 instructs the lender, “Cash-out refinance transactions are only permitted on owner-occupied Principal Residences. 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.”
HUD 4000.1 does provide an exception to the above for qualifying properties that were inherited.
But for FHA No Cash-Out refinance loans, HUD 4000.1 says that occupancy is required in the same way (owner/occupiers only) but the rules do not spell out similar “12 months occupancy” terms for the applicants.
FHA Refinance Loan Payment History Requirements
For FHA Cash-Out refinancing, the lender is required to 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.”
For FHA No Cash-Out refi loans, “For all mortgages on all properties with less than six months of Mortgage Payment history, the Borrower must have made all payments within the month due.”
“For all mortgages on all properties with greater than six months history, the Borrower must have made all Mortgage Payments within the month due for the six months prior to case number assignment and have no more than one 30-Day late payment for the previous six months for all mortgages. The Borrower must have made the payments for all Mortgages secured by the subject Property for the month prior to mortgage Disbursement.”
FHA Maximum Loan-To-Value Ratios
This is one of the most important areas of the FHA refi loan rules you should be aware of before deciding which type of FHA refinance loan you seek. Loan-to-value (LTV) ratios are quite different between cash-out refi loans and no cash-out.
The FHA LTV ratio for cash-out refinance loans is set at a maximum of 85% LTV. The ratio for no cash-out mortgages is a bit more complicated and depends on circumstances. From HUD 4000.1:
“The maximum LTV for a Rate and Term refinance is:
-97.75 percent for Principal Residences that have been owner-occupied for previous 12 months, or owner-occupied since acquisition if acquired within 12 months, at case number assignment;
-85 percent for a Borrower who has occupied the subject Property as their Principal Residence for fewer than 12 months prior to the case number assignment date; or if owned less than 12 months, has not occupied the Property for that entire period of ownership;
-85 percent for all HUD-approved Secondary Residences.