July 7, 2022
What should borrowers know about FHA cash-out refinance loans? There are many areas, but some of the most important include how you can use the proceeds of a cash-out refinance loan, and the rules the lender is required to follow when verifying the borrower is eligible for a cash-out loan.
Borrowers may wish to pay off credit card debt with an FHA Cash-Out refinance loan, or use the money to pay off nuisance debt, buy a car, go on vacation, etc.
What are the rules for FHA cash-out refinance loans and the money back to the borrower?
How To Use FHA Cash-Out Refinance Loan Proceeds
Did you know that some FHA loans have specific guidelines as to how the loan funds may be used? For example, if you applied for an FHA 203(k) rehab loan, you are allowed to use loan proceeds to pay for contractors, labor, and materials associated with your rehab loan project. You cannot use these funds for unapproved purposes.
And when it comes to the improvements themselves? The loan proceeds are restricted to approved projects only; you can’t use the rehab loan funds to pay for a new swimming pool or barbecue pit.
Compare that with the FHA cash-out refinance loan which allows the borrower to use the loan funds that come to the borrower as cash back for any purpose.
The cash-out refinance loan could be used to pay for a remodeling project that’s not eligible for a 203(k) rehab loan, or it could be used to pay off credit card debt, buy a car, etc.
FHA Cash-Out Refi Loan Rules The Lender Must Follow
FHA loan rules require the borrower to have made all mortgage payments “within the month due” for the 12 months leading up to the new loan or for the full amount of time the borrower has owned the home, whichever time period is shorter.
But that’s not all, FHA loan rules in HUD 4000.1 also require the lender to insure there is no “skipped payment” the month prior to the cash-out refi loan;
“…the payments for all Mortgages secured by the subject Property must have been paid within the month due for the month prior to mortgage Disbursement.”
There are other rules in this area. The lender is required to exercise due diligence in cases where the home being refinanced is not in the borrower’s credit report or is not in the borrower’s own name.
In such cases, the lender must, “obtain a verification of Mortgage, bank statements or other documentation to evidence that all payments have been made by the Borrower in the month due for the previous 12 months”.
The lender is also required to make sure the cash-out refinance loan applicant has met the occupancy requirements for the new loan.
“The Property securing the cash-out refinance must have been owned and occupied by the Borrower as their Principal Residence for the 12 months prior to the date of case number assignment.”
These are FHA loan standards and do not reflect any additional requirements the lender may have, and state law may also apply depending on circumstances. Ask your loan officer what additional rules may affect your FHA Cash-Out Refinance loan transaction.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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