FHA Cash-Out Refinance: Converting Equity to Cash

by Karen Lawson
September 17th, 2009

Have you accumulated home equity and find that you could use some cash for remodeling, educational expenses, or debt consolidation? You may qualify for an FHA  cash-out refinance if you can meet the following eligibility requirements:

  • The refinance mortgage amount, including the cash out amount, doesn’t exceed 85 percent of your home’s appraised value. For example, if your home’s appraised value is $250,000 your FHA refinance loan could not exceed $212,500 plus allowable costs and the up front mortgage insurance premium (UFMIP).
  • In order to qualify for the maximum refinancing at 85 percent of home value, your home must have been your principal residence for the prior 12 months or more. If you’ve occupied your home for less than 12 months prior to refinancing, your loan amount will be limited to the lesser of 85% of the new appraised value, or 85 percent of your home’s sale price when you purchased it. If you inherited your home, its original sales price does not have to be considered.
  • All borrowers must occupy the property securing the refinance loan. (Although FHA guidelines do permit non-occupant borrowers for other loan programs, this is not allowed for cash-out refinancing.)
  • Your mortgage payments must be current.
  • You do not need to have an existing mortgage to qualify for cash-out refinancing. Examples of this situation include  inheriting a home that is owned free and clear, or requesting a cash-out refinance after you’ve paying off your original mortgage.

FHA Guidelines for Cash-out Refinancing and Subordinate Liens

A subordinate lien is any type of mortgage loan, home equity loan, line of credit, or other lien against your home that will continue after refinancing is completed.

  • Subordination of existing liens: Any existing liens must be subordinated to the new FHA refinance mortgage. The combined loan-to-value for the refinance mortgage and subordinate lien(s) may exceed 85 percent, provided the borrowers can qualify to make all payments.
  • New subordinate financing is permitted provided the CLTV for the new subordinate lien and the refinance mortgage does not exceed 85 percent. Here’s an example: Your home is worth $250,0000. You want to refinance for $200,000 and have an existing  home equity loan with a balance of  $10,000. the total of both loans is $210,000, or 84 percent.
  • FHA Cash-out Refinancing: Using it Wisely

Converting home equity to cash can be a useful financial tool under certain circumstances; it can provide funding for remodeling your home (and potentially increasing its value). If you’re carrying thousands of dollars in high cost credit card debt, a cash-out refinance can help you consolidate debt. Before taking on a cash-out refinance, it’s a good idea to contact a HUD approved housing counselor or other advisor for learning all of your options and making the best decision for your situation.

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