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The FHA Cash-Out Refinance loan is a tool a homeowner can use to refinance the home and take cash back on the transaction. What does the FHA home loan rulebook, HUD 4000.1, have to say about these loans compared to other FHA refinance options?

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Converting Your Home Equity Into Cash

Converting Your Home Equity Into Cash
May 3, 2019 - The FHA Cash-Out Refinance loan is a tool a homeowner can use to refinance the home and take cash back on the transaction. What does the FHA home loan rulebook, HUD 4000.1, have to say about these loans compared to other FHA refinance options?

Simply put, the FHA cash-out refinance option is unique among the other types of refinances. From HUD 4000.1:

“Cash-out refinances are designed to pull equity out of the Property...” whereas no cash-out refinances of FHA-insured and non FHA-insured Mortgages are “designed to pay existing liens.”

In general, cash out refinance loans under the FHA single family home loan program are designed for borrowers who are current on their mortgages. FHA loan rules say the loan application process for cash-out refinance loans can be complicated by late or missed mortgage payments:

“The Mortgage must be downgraded to a Refer and manually underwritten if any mortgage trade line, including mortgage line-of-credit payments, during the most recent 12 months reflects:
 
  • Three or more late payments of greater than 30 Days;
  • One or more late payments of 60 Days plus one or more 30-Day late payments;
  • One payment greater than 90 Days late.
Furthermore, FHA loan rules state that a mortgage loan that has been modified, “must utilize the payment history in accordance with the modification agreement for the time period of modification in determining late housing payments.”

Cash-out refinance loans require a new appraisal and a new credit check. Borrowers should prepare to apply for a cash-out refinance the same way they did for the original mortgage-work on your payment history so that you have one year of on-time payments on all financial obligations before you apply, reduce your debt-to-income ratio, and do not open new lines of credit before applying for the refinance loan.

FHA cash-out refinancing is a mortgage loan that pays off the original note and replaces it with a new loan. Compare this to home equity loans that do not pay off the mortgage but rather add another loan in addition to the original mortgage.

FHA cash-out refinancing pays the borrower cash once the other financial considerations of the mortgage have been met; the money that remains after closing costs are paid and other expenses as well as the loan itself is the amount that will go to the borrower, which is one reason why it’s a good idea to look into cash-out refi loans after you’ve been paying on your mortgage for a while rather than within the first year or two. The more you have paid on your principal balance, the more cash back you potentially have, depending on circumstances.

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