If you have equity in your home, you might be able to tap into it with an FHA cash out refinance. This program allows you to take out as much as 85% of the home’s value in the cash out refinance. If you are interested in tapping into your home’s equity, keep reading to learn how the simple process occurs.
Apply for the FHA Cash Out Refinance
First, you must apply for the FHA cash out refinance much like you would apply for any other loan. You complete the loan application, which discloses all of the following information:
- Personal identifying information – This includes your name, address, birthdate, and social security number
- Employment and income information – This shows the lender how much money you make now and that you made in the last 2 years
- Asset information – This shows the lender any reserves you have on hand to make your mortgage payments if your income stopped
- Liability information – This shows your current liabilities and how they compare to your current income to prove that you can afford the loan.
Qualifying for the FHA Cash Out Refinance
Just as you saw relaxed guidelines when you applied for the original FHA loan, you’ll likely have flexible guidelines with the cash out refinance.
Technically, the FHA only requires a 580 credit score, but in this case, you’ll likely find lenders that require between a 620 and 680 credit score. This is because you are taking out a larger loan beyond what you already owe. Having equity in the home can work in the bank’s favor if you were to default. If you tap into that equity, the bank loses their ‘benefit’ and they are once again at risk. Requiring a higher credit score helps them decrease the risk of default.
You’ll have to prove that you plan to live in the home as your owner-occupied property. FHA loans are strictly for this purpose. They don’t grant any exceptions in this case. If you can’t prove that you will live there, you will not get approved.
Finally, you’ll need to meet the FHA’s debt ratio guidelines. Technically, they require a housing ratio maximum of 29% and a total debt ratio maximum of 41%. If you have compensating factors, such as liquid assets on hand or a high credit score, the lender may be able to grant an exception.
Get an Appraisal
Assuming your lender preapproves you for the cash out refinance, you’ll need an appraisal. This will help the lender determine how much loan you can have. Again, they can only qualify you for 85% of the current value of the home. If your home appreciated, you could have more equity in your home than you thought, though.
You’ll pay between $400 and $600 for an appraisal. The amount you pay depends on where you live and the size of the home. After the appraisal, the lender will determine how much equity you have in the home by subtracting the amount you currently owe on the home from the value.
Here’s an example. You have an FHA loan with a current balance of $200,000. The appraiser determines that your home is worth $300,000. You have $100,000 in equity. But, you can only take out an extra $55,000, since 85% of $300,000 is $255,000.
There is one exception to this rule. If you have not lived in the home for at least 12 months, the lender must use the original appraised value of the home. The lender will still require an appraisal to make sure the home’s value did not decrease, but you won’t be able to get the higher loan amount if the home appreciated.
Verifying Your Income
Once the lender determines your loan amount, they will need to verify your income to make sure you can afford the loan. They verify your income with your last two paystubs (four if you get paid weekly) and your W-2s from the last 2 years. If you are self-employed or more than 25% of your income comes from commission, you’ll also need to provide your last two years of tax returns.
Closing on the Loan
Once the lender determines that you qualify for the loan, they will finish up the underwriting process and close the loan. This time rather than the seller receiving funds, the bank that holds your original FHA loan will get paid. Once those funds are distributed and all closing costs are paid, the closing agent will give you a check for the remaining amount. You are then free to do what you want with the funds. Your new mortgage payments will begin on the 1st of the second month after your closing. For example, if you closed on October 20th, your first payment would be due on December 1st.
The FHA cash out refinance is a great way to get funds you need for home improvements, college funds, or medical payments. Technically, you can use the funds for anything you need to use them for, but some lenders may need to approve the use first before they will fund the loan. The process is fairly similar to what you went through when you took out your original FHA loan. With low rates and decent closing costs, the FHA loan can be a great way to get the money that you need.Click to See the Latest Mortgage Rates»