FHA Loan Overview
Mortgage refinance loan activity has peaked at an all time high over the last six years due to rising home values and low interest rates. The FHA Refinance program is designed to provide an FHA alternative to the commercial products currently being offered to homeowners with substantial equity in their homes. The purpose of these FHA home loans is to take out a new mortgage that provides cash left over after the old home loan has been paid off.
The FHA loan requirements demand that the applicant for a cash-out refinance loan has occupied the premises for at least twelve months and that payments on the existing home loan have been on time for at least one year. Cash-out refinancing cannot be more than the FHA loan limit for the area of the house being refinanced. The other limit to the amount of a refinance loan may come from the mortgage lender. Many of them limit total indebtedness on a property to 80% of its present appraised value. That means your new mortgage, plus any other mortgage liens you have against the property, cannot total more than 80% of the home’s worth.
If there is a second mortgage on the home, it must be subordinated to the new FHA mortgage loan. The homeowner will have to meet the mortgage lender’s requirements for ability to pay on both mortgages; generally that means the loan applicant must meet the lender’s cap on mortgage payments in relation to total monthly debt. All borrowers must meet certain credit requirements on these loans, and any co-signer on the cash out refinance loan must also be owner occupied on the property. These FHA mortgage loans are limited to homes with a maximum of two living units.
The credit requirements are generally those set forth by the FHA mortgage lender. Because most traditional home loan lenders have tightened up their requirements recently, it is going to be important to shop for a loan with both a decent interest rate and reasonable credit requirements. A few lenders still allow bad credit mortgage loans with the FHA lending guidelines, but usually they have a significant amount of equity and positive compensating factors.
