- Proof of payment and financial history
You will need to complete a new application demonstrating your income and financial history. A cash out refinance application will also require proof of mortgage payments for the previous 12 months.
At Freedom Mortgage, you can often qualify for an FHA cash out refinance with a credit score as low as 550. Other lenders may have different minimum credit scores for their cash out refinances.
Your loan-to-value (LTV) ratio determines how much you can borrow against your home’s equity. LTV is calculated by dividing your mortgage amount by the value of your home. For example, if your home is worth $275,000 and you owe $165,000 on your existing mortgage, then your LTV is 60% ($165,000 ÷ $275,000 = .6 or 60%).
When you get a cash out refinance, your LTV increases. Many FHA cash out refinances limit your LTV to a maximum of 80%. Take a look at this sample calculation, which also estimates how much cash might be available from the home’s equity.
|Current mortgage balance
|Sample maximum LTV
||0.8 or 80%
|Maximum new mortgage balance
||$220,000 ($275,000 x 0.8)
|Maximum cash available
||$55,000 ($220,000 - $165,000)
Your maximum cash available in this scenario does not account for closing costs. When you add closing costs to your loan amount, you will have less cash available to you. For example, if the above example comes with $8,000 in closing costs, this reduces the maximum cash available to $47,000.
In order to receive an FHA cash out refinance, the home you are looking to refinance must be your primary residence. It will have to be considered your primary residence for at least the 12 months prior to your FHA cash out refinance application.
- Appraisal and home equity
Your home’s value may have changed since you bought it based on the market and surrounding properties. An appraisal will help determine how much your home is currently worth and how much equity you have. Lenders use this information to decide whether you qualify for a loan and what mortgage amount they might approve.
You will need to pay closing costs with an FHA cash out refinance, including the Upfront Mortgage Insurance Premium (UFMIP). In total, these closing costs typically average between 3% and 4% according to the U.S. Department of Housing and Urban Development (HUD). If your new loan amount is $220,000, you might pay between $6,600 and $8,800 in closing costs.
- Mortgage insurance premiums
You’ll pay mortgage insurance premiums as part of your monthly bill with an FHA cash out refinance, just like you will with other types of FHA loans.