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Need to start a home improvement project? Some borrowers want to know if there is an FHA equivalent to some  conventional mortgages that allow you to apply for a home equity loan or a home equity line of credit.

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FHA.com is a privately owned website, is not a government agency, and does not make loans.

FHA Loans and Home Equity

July 15, 2022

FHA Loans and Home Equity
Do you need a loan that will allow you to use a home equity home to get cash back at closing time? Do you need cash to pay bills or to make a large purchase? Need to start a home improvement project? Some borrowers want to know if there is an FHA equivalent to some  conventional mortgages that allow you to apply for a home equity loan or a home equity line of credit.

Does the FHA offer a home equity loan? Not in the way some borrowers might think--you can’t get an FHA home equity line of credit or a home equity loan, but you can apply for FHA Cash-Out Refinancing which allows you to apply for a refi loan larger than the amount you currently owe on the home and take the difference in cash.

These FHA loans have the following requirements in addition to the usual credit qualifications:
  • You must have 12 months of on-time payments OR,
  • You must have made all payments on time since obtaining the loan.
  • You must have made a minimum of six mortgage payments.
When approved for FHA Cash-Out Refinancing, the loan rules say you must make a payment the month before the new loan. FHA loan rules do not permit skipped mortgage payments when refinancing.

FHA Refinancing for Properties Owned Free and Clear

FHA Cash-Out Refinancing is possible whether you own the home outright or not. You can refinance a home you own but are still making mortgage payments on, but you are also permitted to apply to refinance a primary residence you own free and clear.

Cash-Out Refinancing Requires a New Credit Check and Appraisal

They also require a new appraisal, which is necessary to establish the current market value of the home. Some borrowers may worry that the new appraisal may affect their property taxes, but an appraisal is not the same as a tax assessment. The appraisal is a tool for the lender to use to establish the market value of the home.

Refinancing After Financial Difficulty

Some borrowers need to apply for a Cash-Out Refinance Loan following a mortgage modification or loan forbearance. HUD 4000.1, the FHA Lender Handbook, says a loan may be possible under these conditions but the lender is required to obtain:
  • A copy of the loan modification/loan forbearance.
  • Payment receipts.
  • Any other information on the amounts and dates of all payments.
There is one exception; a copy of a modification / loan forbearance is not required in cases where the loan forbearance was required because of COVID-19.

FHA Cash-Out Refinancing Rules: Equity and Occupancy

To be approved, FHA Cash-Out loans require you to have 20% equity in the home. FHA Cash-Out refinances also require occupancy--no investment properties allowed. You are also restricted to refinancing a primary residence, which means you cannot use FHA Cash-Out for a vacation home, timeshare, or anything that cannot be classified as real estate such as an RV or a houseboat.

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