With home values on the rise in many housing markets, FHA borrowers are often tempted to consider applying for a cash-out refinance to take advantage of their new property values. A National Association of Realtors report says home values for existing construction increased from more than $190 thousand (2009) well over $275 thousand in 2018.
That can translate into serious borrowing power for some home owners. But knowing your FHA cash-out refinance loan options is important; know the details before you apply for the loan!
Who Qualifies For An FHA Cash-Out Refinance Loan?
The legal title holder (presumably the original borrower or one of the original borrowers) who intends to remain or become an owner-occupier of the home may apply for FHA cash-out refinancing. HUD 4000.1, the FHA loan handbook, states:
“A refinance transaction is used to pay off the existing debt or to withdraw equity from the Property with the proceeds of a new Mortgage for a Borrower with legal title to the subject Property.”
Some borrowers should take note of FHA loan requirements where mortgage payments are concerned.
“The Mortgage must be downgraded to a Refer and manually underwritten if any mortgage trade line, including mortgage line-of-credit payments, reflects:
-a current delinquency; or
-any delinquency within 12 months of the case number assignment date.”
Borrowers who had loan modifications should know the lender is required to use “…the payment history in accordance with the modification agreement for the time period of modification in determining late housing payments.”
FHA Cash-Out Refinance Loan Options
Borrowers should know that cash-out refinance loans guaranteed by the FHA are available in 15-year or 30-year loans, with a maximum LTV of 85%. Not all lenders may offer both loan terms; you will need to see what your chosen financial institution chooses to allow. 15% equity in the property is required and a new appraisal is mandatory.
What options are available to an FHA borrower who wants a cash-out refi? One option is to ask your lender about an FHA Energy Efficient Mortgage loan, which adds funds to the loan for the specific purpose of adding approved, energy saving upgrades to the property. These funds must be used in a specific manner and are not available as a general cash draw for the borrower.
One option borrowers should know is that FHA-to-FHA refinance loans are not the only types of cash-out refi options available. You can refinance an FHA or a non-FHA mortgage (conventional, USDA, VA, etc) to an FHA cash-out refi.
You can technically use the cash-out proceeds in any way you see fit, but some lenders may not allow certain types of transactions such as getting a cash-out refi loan, buying another property, then selling the home that was just refinanced.
Some lenders may require you to own the property for a specific amount of time for some refinance loan transactions. Does this specifically apply to FHA mortgages or for all refinance loans? That’s a question you will need to ask the lender, where applicable.
Borrowers have the option to use cash-out loan proceeds to remodel their home, but using funds for this purpose may or may not be the best use of the money when there is an FHA 203(k) rehab loan available for these specific needs. Some borrowers just need enough money to complete a specific set of repairs or renovations; an FHA Limited 203(k) rehab loan can help pay for this without committing to a larger mortgage.
That option is not right for everyone, but for those who don’t need to get full amount of cash out from an FHA Cash-Out Refi loan to meet their home improvement goals, the Limited FHA 203(k) Rehab Loan might be the better choice.