Refinancing with an FHA loan can be an effective way to keep using the equity in your house to your benefit. With an FHA Simple Refinance, homeowners can go from their current FHA loan into a new one, a fixed-rate or ARM. This straightforward refinance is a no cash-out product that does require credit, income, and asset quantification to ensure the borrower meets the loan requirements. There are 2 other FHA refinance loan programs to consider when looking to lower interest rates; the Streamline Refinance and the FHA Cash-Out Refinance. Both FHA refinance programs require an upfront mortgage insurance premium and monthly insurance premium.
Homeowners can use the FHA streamline refinance to lower their interest rates with minimal paperwork. This loan program does not have the option of receiving cash back at closing, but you can include your closing costs in your refinance. Since this loan requires little documentation and few qualifications, most FHA streamline loans can close quicker than a conventional loan.
The greatest benefit of the FHA cash-out refinance is the ability to receive cash back at closing while simultaneously lowering the rate and/or changing the loan terms. FHA cash out maximum loan to value is 85% of the home’s current value, a new appraisal is required, and these funds can be used for such purposes as:
Purchasing or paying of a car loan
Borrowers must verify sufficient income to qualify for their new loan. Two most recent paycheck stubs from their employer showing current and year to date earnings, W2 forms from the last two years, or two most recent filed federal income tax returns will be required.
A new appraisal report on the subject property will be required for the FHA cash out refinance. The value of the appraisal is used to determine the maximum allowable loan amount for the FHA cash out loan. 85% is the current maximum loan-to-value for an FHA cash out refinance as long as the property was purchased more than one year ago and does not exceed FHA’s county loan limits.
An FHA lender may request bank statements as part of their underwriting guidelines, but typically, asset verification in the form of bank and investment statements are not required as no funds are needed in order to close the loan.
The minimum credit score required for an FHA cash out refinance is typically between 620 and 680. It is important to check with an FHA specialist to see if your FICO is high enough; lenders usually have their own internal requirements that may be higher than the minimum.
Mortgage Payment History
You may not have more than one payment that was more than 30 days late in the last 12 months in order to qualify for an FHA cash out.
Ownership of the Home
An FHA lender will use the lower of the two appraised values, or the original purchase price of the home, to determine your maximum loan amount if you’ve lived in the home less than 1 year. For example if you purchased the home less than a year ago for $200,000 and it now appraises for $265,000, your maximum loan amount will be $170,000 (85% of $200,000).