This type of loan offers several advantages including the ability to access a lower interest rate, pay off debt, and receive cash back from the loan. However, there are some basic rules that borrowers should know before starting the refinancing process.
First, borrowers must meet the credit eligibility requirements set by FHA in order to qualify for a cash-out refinance loan. This includes a minimum credit score of 580 and the ability to show proof of steady employment. Additionally, FHA guidelines require that borrowers have at least six months of regular payments on their existing mortgage.
Second, borrowers need to make sure that they have enough home equity to qualify for a cash-out refinance loan. The loan amount cannot exceed 85% of the appraised value of the home. The FHA also stipulates that the borrower cannot exceed the total debt-to-income (DTI) ratio of 43%.
Third, FHA cash-out refinance loans come with a few additional restrictions. Borrowers cannot use the proceeds from the loan for any form of investments. Further, the loan proceeds cannot be used to purchase second homes or investment properties. Borrowers who want to use their home equity for these types of investments must use a different kind of loan.
Finally, when applying for a cash-out refinance loan, borrowers should understand the closing costs associated with the loan. Closing costs typically include appraisal fees, title search fees, and legal costs associated with obtaining and refinancing the loan. Additionally, borrowers need to consider the potential increase in their monthly mortgage payment due to the new loan terms.
In summary, the FHA's cash-out refinance loan offers many advantages for eligible borrowers. However, borrowers should understand the eligibility requirements, loan restrictions, and closing costs associated with a cash-out refinance loan before proceeding with the process. To ensure a successful cash-out refinance loan, borrowers should have good credit, enough home equity to cover the loan amount, and be aware of the potential costs. By following these basic rules, homeowners can easily access the money they need from their home equity.
This article was contributed on Oct 20, 2023