Who Qualifies for an FHA Refinance?
It’s a common misconception that the benefits of FHA loans are solely enjoyed by first-time buyers with limited means or problematic credit history. As the largest insurer of residential mortgages in the world, the Federal Housing Administration has covered millions of properties since its inception in 1934.
The truth is, many of the U.S. borrowers with an existing FHA or non-FHA loan can also refinance their mortgage to take advantage of current low rates or help stabilize their financial situation during these uncertain times by taking cash out of their home. However, before we ask who qualifies for an FHA cash-out refinance, let’s take a brief look at the different types of government backed loan programs available.
FHA Refinance Options
The FHA secures funding for a variety of other programs including Streamline, Rehab and No Cash-Out refinances. Also referred to as a low-doc program, the FHA Streamline requires less paperwork, no home appraisal and no cash-out option. The FHA Rehab Refi is for borrowers looking to make home improvements or repairs. The funds must be dedicated exclusively to the rehabilitation projects requested in the loan. The No Cash-Out program is specifically used to pay existing liens. Any money back would be in refund form and cannot exceed $500.
There are several undeniable upsides to acquiring an FHA Cash-Out Refinance, besides the laxer requirements of the government-backed program. By accessing the growing equity in your home, you can obtain a new mortgage with a new rate and get cash in hand for the difference between the new loan amount and the current value. The longer you’ve lived there, the more equity to tap into. Whether using it for consolidation of high interest debt, medical bills or home improvements, it’s up to you – there are no restrictions on the use of funds as there are with other FHA refi options.
Qualification is the next step in the process. The FHA has some specific guideline requirements and others may vary by lender.
FHA Requirements for Cash-Out Refi
The basic eligibility conditions for an FHA Cash-Out Refinance include:
• Home is primary residence and mortgage paid for at least 12 months.
• No late or missed payments in the previous year.
• Minimum credit score of 580.
• At least 20% equity in the home based on appraisal.
• Conversely, a maximum 80% loan-to-value ratio (LTV).
• Debt-to-income ratio below 41%. By having more income than money owed, it helps ensure the borrower can make new loan payments.
• Any federal tax or non-tax debt should be resolved prior to refinancing. This could involve a payment plan that is agreed to by the creditor and lender.
While these are the basic requirements, remember that lenders may vary in their qualification process. You’ll also want to include refinance fees and mortgage insurance when calculating the pros and cons.
Where Can You Get an FHA Cash-Out Refi?
There can be noticeably more room for forgiveness when financing through FHA if you’re working with a struggling credit history and wish to take advantage of current rates. Fortuitously, these benefits are available through a variety of sources, from large banks to smaller, independent mortgage lenders. It pays to shop around first.
Standards, costs and services will vary, so begin your search with EnTrust Funding (ETF) for up-to-the-date rates and trustworthy feedback on your current situation. We have years of experience and knowledge in all areas of the mortgage process, including FHA cash-out refinancing. Give us a call today!