When you need funds for major expenses or even want to lower your mortgage’s interest rate, an FHA cash-out plan can help if you’re a homeowner. Discover how to leverage your home equity to improve your finances.
What Is an FHA Cash-Out Plan, and How Does It Work?
You may also hear people refer to this plan as an FHA cash-out refinance. As these names suggest, this is a way to access extra capital by refinancing your home for a larger mortgage than your existing plan.
Even if the Federal Housing Administration does not back your existing loan, you can use this product. It allows you to refinance up to 80% of your home’s value and keep the difference.
As a quick example, if your home is worth $250,000, you could potentially borrow up to $200,000. Maybe you’ve paid your mortgage’s principal down to $100,000, and you need $50,000.
With an FHA cash-out plan, you take out an FHA-backed loan for $150,000. This gets you the $50,000 cash you need and uses the remaining $100,000 to take the place of your current mortgage.
What Are the Requirements for an FHA Cash-Out Plan?
Though this loan’s requirements are not as stringent, you’ll still need to meet certain guidelines from the FHA and your lender.
In many cases, the minimum credit rating for these loans is 580, but that varies by lender. If you need help determining how you can qualify for a loan with bad credit, discuss your situation with a friendly loan officer from Associates Home Loan to understand your options.
DTI and LTV
Your lender also examines your debt-to-income and loan-to-value ratios. For an FHA cash-out refi, your DTI usually can’t be above 43%. For your LTV, you must retain at least 20% equity in your property after completing the refinance.
The FHA sets loan limits annually, and the amount for your area is usually 115% of the local median home price. You can find the limits for your county on the Department of Housing and Development’s website.
However, the FHA also sets a minimum and maximum for the country. For 2024, the national floor is $498,257, and the ceiling is $1,149,825.
You must have mortgage insurance whenever you get approval for an FHA loan. Initially, you pay 1.75% of the loan. Then, you’ll cover a yearly premium that sits anywhere between .45% and .80%.
Property and Occupancy Requirements
The FHA also requires you to have lived in the home for at least 12 months prior to getting a refinance. It should also be your primary residence.
Mortgage Payment Standing
Your existing mortgage must be in good standing. This means you’ve been on time with payments for the last 12 months.
What Is the Process for Refinancing With an FHA Cash-Out Plan?
Refinancing with an FHA cash-out plan is easy if you work with a reputable lender, such as Associates Home Loan.
Check Your Home Equity
Your home equity determines how much you can borrow. Calculate this figure by learning your home’s market value and subtracting the amount of mortgages and liens against the property.
Find a Lender
All FHA loans go through approved lenders, and the lender doesn’t have to be a bank or credit union. Working with a private lender is an excellent option that has many advantages, such as greater flexibility.
Apply for a Loan
You’ll have to fill out a loan application and supply details to confirm your identity, residence, income, and liabilities. Your loan officer will check your current credit score and submit your application for approval.
Sign and Close
If you’ve prepared well and followed the guidance of your lender, you have better odds of them approving your deal. If they do so, you’ll sign the final paperwork and get the figures on closing costs, which you could potentially roll into your loan.
What Is the Difference Between a FACOP Refi, a HELOC, and an FHA Cash-Out Plan?
Some lenders are using the term FACOP or FACOP refi, which stands for “Federal Assistance Cash-Out Program.” This is not an official term and is essentially a marketing tactic to draw more attention to the company’s FHA cash-out plan.
On the other hand, a home equity line of credit is a different way to leverage your home’s equity. With a HELOC, you borrow against your home’s value as collateral instead of taking out a new mortgage. Rates may be higher, but this can be a better plan for some folks.
What Are the Benefits of an FHA Cash-Out Plan, and Who Should Use One?
Many people can benefit from getting an FHA cash-out plan because of its multiple advantages.
The FHA is a government entity with the goal of improving home ownership and stabilizing the housing market. To do this, it backs loans with less stringent requirements than conventional loans. When you’re not able to access funds through other means, an FHA cash-out plan may be right for you.
Flexible Use of Money
Some loan products have restrictions on how you can use the money, but an FHA cash-out does not. You can use it for home improvements, large expenses, education, debt consolidation, investments, or an emergency fund.
Possible Better Interest Rates
If you got your existing loan when interest rates were high, refinancing might help you lower your rates. Plus, mortgages typically have better rates than other loans and credit cards, especially if your credit is not excellent.
What Are the Possible Disadvantages of an FHA Cash-Out Plan?
Loan products are not one-size-fits-all, and refinancing a home is not right for everyone. You shouldn’t unnecessarily increase your debt without a good plan of how you’re going to use and repay the money.
You might end up with increased mortgage payments or added costs that you can’t handle. Remember that you can prevent problems with good planning and working with a reliable lender.
How Can Associates Home Loan Help You With Your FHA Cash-Out Plan?
Associates Home Loan is an experienced private lender that helps residents of Florida find practical financial products. When you’re ready to access an FHA cash-out plan, we can help. Talk to our friendly team to get started.