FHA Cash Out Refinancing in 2020

Written by Posted On Sunday, 09 February 2020 05:30

FHA loans have been the hands-down choice for first timers for quite some time. The Federal Housing Administration’s flagship mortgage program only requires a down payment of just 3.5 percent of the sales price of the home. At the same time, qualifying for an FHA from a credit standpoint is also easier compared to other low down payment loan options. Low down payment and easier qualifying is an excellent combination for those saving up to buy their very first home. 

At some point however, homeowners could consider refinancing an existing mortgage. Maybe rates have fallen lower than the rate currently on the note. That’s typically the most common reason refinancing can make sense but there are other reasons. Changing loan terms can also be a valid reason to refinance. Different loan terms simply means shortening or lengthening the life of the loan. A 30 year term will have lower payments than say a 10 year loan, for example. 

On the flip side, a longer loan term means more interest is paid over the life of the loan. A shorter loan term will mean higher monthly payments over the course of the loan, but the amount of interest paid is significantly less. But once a decision has been made to refinance, there may also be an option to pull out cash as part of the transaction. This is an FHA cash out refinance.

There have been some changes to the FHA refinance program when pulling out cash occurs. These changes implemented late last year changed the limit on how high the new cash out loan can be compared to the current market of the property. The maximum cash out limit is now 80 percent of the value of the property compared to 85 percent previously. 

Other FHA guidelines for a cash out loan include a minimum credit score of 580 when the loan amount is less than 90 percent of the value of the property but can go as low as 500 when there is more equity in the home. With a cash out refinance, there will be a limit at 80 percent. An FHA cash out loan is also fully documented, just as it was when using an FHA loan to purchase and finance a home.  

Existing FHA loans may also be eligible for a “streamline” refinance which simply means less documentation is required for an approval. With a cash out FHA loan, there is no such option. Other requirements include verifying there have been zero payments made within the last 12 months more than 30 days past the due date. Owner occupancy is also still required. This requirement can be fulfilled by providing a copy of utility bills going back at least 12 months. You’ll need to speak with your individual lender how to comply with this FHA guideline.

Finally, remember that pulling cash out of a property reduces the amount of equity in your home. With an FHA cash out loan, this is partially addressed by limiting how high the loan can be compared to the current market value of the property. Pulling cash out during an FHA refinance should only be a secondary consideration, not a primary one. If converting equity into cash is the primary focus, a home equity loan is probably the better answer. 

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending.

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country.

Reed was the former Technology Chair for the Texas Mortgage Bankers Association, Board Member and President of the Austin Mortgage Bankers Association. He is married and a father of three in Austin.


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