July 27, 2018
Is the credit check for an FHA cash out refinance loan the same as for a new purchase home loan? Borrowers want to know how their credit will measure up to lender standards when it’s time to apply for a refinance loan.
Some make the same common mistakes in the months leading up to a refi loan application that others do when applying for a new purchase home loan. What can you do to increase your chances at refinance loan approval?
Treat An FHA Cash-Out Refinance Loan The Same As Your Original Mortgage
FHA cash out refi loans require both a new credit check and a new appraisal. The reason for the new appraisal is to make sure you are getting the value in your home that market values currently reflect. In a time where rising property values may increase your potential cash out, the appraisal makes sure you have the most current valuation of the property.
The appraisal is not optional, and can’t be done over for those who might disagree with the results. If your home needs repairs or improvements that may affect the value, you may wish to consider the type of refinance loan you need.
Some borrowers may, upon reflection, decide that an FHA rehab refinance loan is a better option if the value of their home is dependent on improvements.
FHA Cash-Out Loans Will Require An On-Time Payment History
Lender standards will vary, but in the same way your original home loan required you to bring 12 months on-time payments on your financial responsibilities, the cash-out refinance will also require a similar demonstration that you are a good credit risk.
Don’t be late on any mortgage payments in the 12 months leading up to your cash out refinance loan, and don’t miss credit card bills or other obligations either. The lender will see your payment history and make a determination on the patterns of reliability in your credit record.
FHA Loan Rules On Late Mortgage Payments
Those who seek FHA cash-out refinance loans should know that the FHA loan rules in HUD 4000.1 that govern these transactions states:
“The Mortgage must be downgraded to a Refer and manually underwritten if any mortgage trade line, including mortgage line-of-credit payments, during the most recent 12 months reflects:
-three or more late payments of greater than 30 Days;
-one or more late payments of 60 Days plus one or more 30-Day late payments; or
-one payment greater than 90 Days late.”
But the FHA standard is NOT the only one at play when it comes to cash out refinance loan approval. The lender’s requirements may and often are more strict than what is mentioned here in the FHA loan rules. You will need to discuss your concerns with the lender to see what credit standards may apply above and beyond the rules above.
Credit checks involve more than just FICO scores. Your payment record will be an important part of home loan approval whether a cash out refinance loan or a new purchase FHA mortgage.
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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