February 3, 2012
A reader asks, “Is it possible to get an FHA loan and consolidate my house and credit card?”
According to FHA loan rules, new purchase FHA loan amounts are limited to the statutory loan limit for the area, or “a percentage of the lesser of the appraised value, or sales price.” This would preclude getting cash back on the deal unless the borrower was owed a refund of some kind–FHA loans also require at least a 3.5% minimum down payment. The borrower must provide funds to close the deal.
But FHA refinancing loans do feature a cash-out refinancing loan option. FHA rules do technically permit FHA cash-out refinancing for debt consolidation, but advises lenders, “Cash out refinancing for debt consolidation represents considerable risk, especially if the borrowers have not had a corresponding increase in income. Careful evaluation of this type of transaction is required.”
In some cases, financial institutions offer debt consolidation loans that, according to the FHA official site, “wrap the borrower’s existing mortgage into debt consolidation loans, jeopardizing the borrower’s equity and the home itself.” This is a practice the FHA describes as predatory lending. You can find the full details at http://portal.hud.gov/hudportal/HUD?src=/states/wisconsin/homeownership/predatorylending.
The FHA warns of debt consolidation loans that feature high interest rates, deceptive terms and conditions, excessive fees, and in some instances, balloon payments where “loans are amortized over 15-30 years, but after 2-5 years, the entire loan becomes due in full”.
There’s nothing wrong with exploring your options when it comes to debt consolidation, but it’s vital to read all paperwork and documentation carefully–especially when your mortgage is concerned. Don’t be fooled into a predatory loan that seems to offer you a quick and easy way to consolidate your current debts. Contact the FHA for assistance before committing to any such program.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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