FHA Payout Refinance Requirements | bank rate
Your home is your most valuable asset, and if you’ve paid off a significant portion of your mortgage, it can also help you borrow more money for bigger expenses like paying for college or renovating your kitchen. One way to use the equity in your home is with an FHA payout refinance.
What is FHA Payout Refinance?
An FHA payoff refinance involves paying off your existing mortgage with a new, larger mortgage that is insured by the Federal Housing Administration (FHA). The size of the larger loan is based on your level of equity, how much outstanding debt you have on your current loan, and how much additional funding you need. Ideally, the new mortgage will also come with a lower interest rate.
How an FHA payout refinance works
Say you currently owe $200,000 on your existing mortgage and an estimate shows your home is worth $400,000.
With an FHA payout refinance, you could borrow up to $320,000 — 80 percent of your property’s value. In this case, $200,000 of that would be used to pay off your existing mortgage.
However, you don’t have to borrow the full $320,000. Let’s say you only need $100,000 to complete a major home renovation. You would instead go through a new mortgage application process – similar to your first mortgage – for a $300,000 mortgage. Once approved, $200,000 of that will be used to pay off your old mortgage and you’ll start making monthly payments on your new $300,000 loan.
There are closing costs to consider (more on that below), so be sure to factor those in if you plan to include these costs in the new mortgage as well. It may also be necessary to set up a new escrow account.
FHA Payout Refinance Requirements
The FHA has minimum requirements for FHA loans, including refinances, but FHA lenders may set their own standards in addition to these.
- Credit-worthiness: While FHA loans often grab the headlines for allowing credit scores as low as 500, the reality is that you need a higher credit score to get the best FHA payout refinance deal. Some lenders will approve a credit score as low as 620, but the lowest interest rates go to borrowers with credit scores of 740 or higher. If you’re hoping to qualify for a payout refinance, work on improving your credit score well in advance of applying.
- Debt to Income Ratio (DTI): In most cases, your DTI ratio cannot exceed 43 percent. If you have other loans or debt, it’s a good idea to try to settle things before applying for refinance.
- Loan to Value (LTV) Ratio: After the payout refinancing, you need at least 20 percent equity in your property.
- Loan Limits: There is a cap on how much you can borrow, regardless of how much your property is worth now. In most places the limit is $420,680 for a single family home, but in some higher priced areas the limit is $970,800.
- Mortgage Insurance: All FHA loans, including cash-out refinances, require mortgage insurance. You pay an upfront premium of 1.75 percent of the loan amount, and then an annual premium for the next 11 years that ranges from 0.45 percent to 0.80 percent of the loan amount, depending on the length of your new mortgage. (While most FHA loans require mortgage insurance for the life of the loan, anyone with a 90 percent LTV ratio can waive it after 11 years.)
- Use and ownership requirements: The house must be your primary residence and you must have lived in the property for at least the last 12 months. If you only moved in six months ago, you need to hold on tight before considering a payout refinance.
- Payment status: You must be in good standing with your current mortgage, which means you have made at least the last 12 monthly payments on time.
How Much Money Can You Get With an FHA Payout Refinance?
The answer depends on a few factors, but there is one key piece of information that will determine how much cash you can get: how much your property is worth.
Let’s say you have $120,000 left to pay your mortgage and your house is worth $350,000. In this case, you could borrow up to $280,000 (80 percent of the value), use $120,000 to pay off your current loan, and have $160,000 left over. For an even more accurate estimate, factor in a 4 percent closing cost ($11,200) for a balance of $148,800.
FHA payout refinance costs
An FHA payout refinance is not a free route to more money. You must pay closing costs for the new loan, which typically range from 2 percent to 6 percent of the loan amount. So if you’re withdrawing $250,000, that closing cost can be as low as $5,000 or $15,000.
Your closing cost includes an upfront FHA mortgage insurance (MIP) premium equal to 1.75 percent of the loan amount ($4,375 in the example above). There are also many other fees to consider, including fees from your lender and for services like an appraisal and title search.
FHA Payout Refinance Rates
When comparing refinance rates for FHA payouts, look for the APR, or the APR that takes into account the fees you pay. The APR gives a more accurate picture of the cost of a loan.
For example, you might see an interest rate of 4.375 percent on a 30-year FHA refinance, which seems like a good deal. However, the APR could be more than 5.3 percent due to mortgage insurance, rebate points and other costs.
Pros and Cons of FHA Payout Refinance
Any time you risk your home, it’s important to weigh the pros and cons.
Benefits of FHA payout refinance include the potential to be approved with a lower credit rating and the fact that borrowers with any type of existing mortgage — not just FHA loans — could qualify.
Another benefit of an FHA loan can come at a surprising time: when you’re ready to relocate. FHA loans are acceptable, which means that another buyer who meets the FHA’s credit qualification guidelines could assume the loan.
“That underlying FHA mortgage could be an advantage,” said Todd Johnson, senior vice president, Southeast Retail Mortgage Sales Director at Wells Fargo. “If interest rates are much higher than they are today, the listing may market a decent loan and potentially be easier to sell.”
However, the downsides include taking on more debt (probably with higher payments) and a host of other costs like MIP, an appraisal fee, and paying for title services. Also, FHA payout refinances are only eligible for the home you live in—you couldn’t do this refinance for a rental or second home.
FHA Cash Out vs. Conventional Cash Out Refinancing
Both an FHA payout refinance and a traditional payout refinance have the same endpoint: getting more money.
However, if you have the required credit for the conventional route, you can opt for it to avoid the MIP payment.
This is an important consideration, Johnson says. Traditional mortgages with an 80 percent LTV ratio do not require personal mortgage insurance (unlike FHA MIP).
However, this does not necessarily make a conventional loan cheaper. Johnson cites the example of an Arizona homeowner with a 660 credit score refinancing a $360,000 home. At the time, a 30-year FHA fixed rate was actually cheaper — an APR of 6.267 percent and a monthly payment of $1,854 that includes mortgage insurance — than a traditional 30-year fixed rate, which has an APR of $7.394 percent and $1,940 monthly had payment. (Both excluding property taxes and home insurance.)
While interest rates and expenses vary by state and change daily, this chart is a reminder to consider a number of options with a big financial move like refinancing.
“It’s important that the client always address these discussions with lenders to make an informed decision that makes the best decision for their personal circumstances,” Johnson says.
It’s also worth speaking to your accountant or financial advisor, who can help you understand if refinancing is affecting your ability to save.
FHA Payout vs. FHA Rationalization Refinance
If you don’t need to borrow more money when you make a withdrawal, an FHA streamline refinance can be an easier way to try and save money on your monthly payments. As the name suggests, the process is streamlined – less paperwork and less underwriting work required. There are also non-credit qualifying options, meaning you can be approved without researching your credit history. However, FHA streamline refinancing is only available to existing FHA borrowers.
|Credit required||Generally 620 (some lenders may accept lower)||No credit documentation required|
|Opportunity to withdraw more money||Yes||no|
|Available to borrowers with||Any type of existing mortgage (conventional, FHA, VA, or USDA)||Must have an existing FHA mortgage|
Alternatives to an FHA payout refinance
There are other ways to borrow money that don’t involve refinancing your home. Consider these alternatives to FHA payout refinancing:
- Home Loans: Rather than taking out an entirely new mortgage on your home, a home equity loan is a second mortgage. You can borrow a lump sum based on the amount of equity in your home and pay back the money in installments over a set period of time. Fixed rates can be as competitive as mortgage rates, and some lenders don’t charge closing costs.
- Homeowner’s Line of Credit (HELOC): A HELOC is very similar to a home equity loan, but it’s a line of credit, so you’re borrowing money when you need it rather than taking out a big chunk of cash. Most HELOCs are variable rate loans like credit cards, meaning your payment can fluctuate as interest rates rise or fall, and they often come with an annual fee whether you use them or not.
- Private loan: A personal loan is another possible way to borrow money instead of withdrawing cash while refinancing your mortgage. The big advantages of personal loans include the ability to get the money quickly (some lenders will give you cash next business day) and lower credit score requirements for approval. However, there is a catch: Many personal loans are associated with high interest rates. Make sure you do the math before agreeing to a costly deal.