Part 2: Cash-Out Refinancing Conforming vs. FHA

Part 2: Cash-Out Refinancing Conforming vs. FHA

posted in: Mortgages

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Because of the changing rules regarding cashing out equity in your home, the purpose of this blog is to show you the difference between a FNMA, Conforming cash-out refinance scenario and one that is covered by the FHA rules. Additionally, the fees and the structuring of the two loans are also covered. The loan officer at 7th Level Mortgage can provide you with more detailed information and can customize the loan to meet your specific needs. By no means are the costs I am providing exact because each state has its’ schedule of fees and the title costs vary from state to state. Be sure to read the documents covered by TRID and provided to you when the loan officer sends you the loan documents for signature. The fee for the lender is typically between 1 and 2 points.

Conforming, Conventional Cash-Out Refinancing:

Conforming, conventional, cash-out refinancing is offered by lenders who are FNMA/FHLMC approved lenders. The terms and conditions of these loans are more stringent than FHA lenders because these lenders are private.  The transaction must be used to pay off existing mortgages by obtaining a new first-position loan. This property must not have any other liens or encumbrances after the closing and /or funding of the loan. If the property was on the market, it must be taken off the market before closing and disbursement of the new loan. It must have been purchased and held by the borrower for at least six months except for:

There is no waiting period. This means that the property was acquired through inheritance, divorce, separation, or dissolution of a domestic partnership. When you send in your supporting documents, include paperwork proving that these conditions are met.

If the property being refinanced is in the name of an LLC, it MUST be taken out of the LLC. No FNMA or FHLMC lender will finance or refinance a property held by an LLC; it must be held by a private individual or individuals.

If the property is owned and held by an inter vivos trust, the property must be taken out of the trust before closing and disbursement can occur. If the DTI exceeds 45%, six months reserves are required.

LTV: The max loan to value on the loan is 75.00. If you choose to go with any loan with an LTV of 75.01% to 80% will incur upfront PMI as well as monthly MI. You must escrow taxes and insurance as well.

DTI: The maximum DTI is not to exceed 45%. If it does, you must show six months reserves.

FICO SCORE: The minimum FICO score for a cash-out, FNMA mortgage up to 75% LTV is 640. This applies to a fixed-rate mortgage. If you have chosen an ARM the minimum FICO score is 620 for limited cash-out refinance scenarios. For a SFR, the credit grade score needs to be at least 680 if the LTV is greater than 75% or 660 if the LTV is less than 75%.

Again, what you have just read are general guidelines. The loan officer can explain in more detail what the credit score, maximum DTI, and maximum LTV need to be based on your unique situation.

FHA Cash-Out Refinance:

There are definite differences between FNMA conforming, conventional cash-out refinance guidelines and FHA cash-out refinance guidelines. I urge you to consult with your loan officer at 7th Level Mortgage to go over the difference so you can pick the program that will best suit your needs. The guidelines are enumerated here for your convenience. Keep in mind that these are guidelines and because everyone’s needs are different your costs will vary.

LTV: The maximum LTV for an FHA, cash-out refinance is 85% with a loan limit of $417,000. The loan must be current on payments and it must be seasoned for 12 months and the current month’s payment must be on time. If there is a second position lien in place the following rules apply:

  • No prepayment penalty
  • No balloon payments less than 10 years
  • All payments made must not exceed the borrower’s ability to repay
  • The payment on the second lien must be the same as it was before closing the new loan

If the new mortgage payment plus the second payment causes the DTI to exceed 43%, I recommend paying off the second mortgage to offer a more convenient payment plan and to keep the payments more affordable. Your loan officer and processor will order the pay-offs for the first and second mortgages. If your equity position is such that you choose to keep the second mortgage in place, the lender must sign a subordination agreement.

DTI: The maximum allowed is 43%. That includes taxes, insurance, and principal and interest payments, in addition to any other recurring debt payments you have.

FICO Score: The minimum FICO Score acceptable is 580. If you have applied for a FNMA Cash-Out refinance and your credit score is not acceptable, consider an FHA cash-out refinance instead.

The new FHA mortgage can be a fixed-rate mortgage, a 1 year ARM, or a hybrid ARM. The documentation for an FHA mortgage is standard. All FHA standards for appraisal and title must be met as well. The loan officer at 7th Level Mortgage will guide you through the entire process.