FHA Cash-Out Refinance

The typical reasons you might choose an FHA cash-out refinance over other options are the higher LTV and more lenient credit score requirements. In exchange for those easier qualifications, this loan will require that you get mortgage insurance.

As with other cash-out refinance loans, you’ll have plenty of flexibility as to what you can use the cash from your equity for. And as with any type of refinance, you’ll want to weigh the potential short and long-term costs against the expected benefits to decide ultimately if it’s the right move for you.

Some common ways you can take advantage of an FHA cash-out refinance:

• Consolidate high-interest debt. If you have burdensome credit card bills or other debts you’d like to get rid of, you can take the cash from a refinance to pay those off so you end up with one low fixed rate payment every month. Typically the rate on an FHA cash-out refinance would be a lot lower than the average credit card, which can run over 21%.
• Renovate or repair your home. Use your equity to pay for enhancements to your home, which can in turn increase its resale value. You may also be able to write off the interest on the loan on tax day when it’s used for such purposes. Consult with your tax advisor for further details about the deductibility of mortgage interest and charges.
• Cover unplanned expenses. Allow your home equity to save the day in the event of significant unplanned expenses.
• Fund an education, business venture or any other long-term goal. Leverage your home equity now to invest in your future and give yourself a chance at increasing your future earnings.

If you currently have an FHA mortgage and have the sufficient equity to draw from, you are not limited to just FHA loans to do so. Depending on the current status of your credit score, LTV and other financial health indicators, you may want to see if you can qualify for a conventional cash-out refinance first.

Unlike FHA loans that require mortgage insurance from 11 years up to the life of the loan (depending on the down payment/LTV at origination), conventional loans only require it when the equity owned in the home is below 20%. Plus, the insurance on a conventional loan will eventually be removed by the mortgage servicer without any need to refinance once that 20% threshold is reached (given the account is in good standing). A conventional cash-out refinance will require a higher credit score and longer period of positive credit history over an FHA loan.

Those with less than stellar credit history can benefit greatly from the more lenient qualifying standards of an FHA loan. For example, if a homeowner has ever had a foreclosure, that individual would potentially be eligible to qualify for an FHA cash-out refinance four years sooner than a conventional loan, which in this type of scenario would typically require about seven years to pass before being able to qualify.

If you have the sufficient equity available to draw from and there haven’t been any dramatic changes to your financial profile since you first got your mortgage, you may be in a good position to qualify for an FHA cash-out refinance. The process of applying for this type of loan would not be a lot different than when you bought your home. Some of the basic requirements include:

• You should have a steady employment history
• The home must be your primary residence
• An appraisal will be made by an FHA-approved entity
• Your credit score must be 580 or higher

Connect with a Pennymac loan expert to explore what you could qualify for.