July 3, 2017
What is an FHA cash-out refinance loan? These types of loans are designed to help the borrower draw equity out of the property being refinanced. Once the original loan is paid off, and the new loan’s fees are covered, the remaining cash comes back to the borrower for any purpose acceptable to the lender.
Cash Back, LTV Limits
FHA cash-out refinance loans are different than FHA Streamline Refinance loans, which are restricted to FHA-to-FHA transactions and don’t allow any cash back except refunds. FHA cash-out refi loans are “appraisal required” and feature an LTV limit. That limit is 85% of the adjusted value of the home.
There is also a mortgage limit found in the cash-out refi rules in HUD 4000.1: “The combined mortgage amount of the first Mortgage and any subordinate liens cannot exceed the Nationwide Mortgage Limit described in National Housing Act’s Statutory Limits.”
Occupancy Rules
FHA loan rules specify an occupancy requirement for FHA cash-out refinancing. The borrower must use the property to be refinanced as her primary residence-something we covered in Part One. But did you know that the occupancy requirement in some cases requires the lender to make sure the home to be refinanced was previously used as the main residence? According to HUD 4000.1:
“The Mortgagee must review the Borrower’s employment documentation or obtain utility bills to evidence the Borrower has occupied the subject Property as their Principal Residence for the 12 months prior to case number assignment.”
FHA Energy Efficient Mortgages
FHA cash-out refinances permit the borrower to include an FHA Energy Efficient Mortgage (EEM) option to the loan. FHA EEMs allow additional funds in the loan to cover approved energy-efficient upgrades or improvements to the property.
FHA Mortgage Insurance Premiums
For borrowers with existing FHA loans who are interested in an FHA cash-out refinance loan, the question of mortgage insurance premium refunds is often a concern. According to HUD 4000.1:
“If the Borrower is refinancing their current FHA-insured Mortgage to another FHA- insured Mortgage within 3 years, a refund credit is applied to reduce the amount of the Upfront Mortgage Insurance Premium (UFMIP) paid on the refinanced Mortgage, according to the refund schedule” found on page 408 of HUD 4000.1.
Lender standards, state law, and other additional considerations may also apply to any or all of the above. Speak to a loan officer to discuss your FHA refinance loan needs.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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