How can an FHA Cash-Out Refinance Help Homeowners from Drowning in Debt?

Everyone would like to share in the American dream in which a person has a home that is theirs, great health, and enough money to live a comfortable life. While some have achieved this, others have struggled to be able to provide for themselves as well as their families. Those who have accumulated too much debt and no means to pay it off wind up in shelters or living on the streets; struggling to survive. Debt has the ability to weigh a person down and too much of it can cause one to drown. Homeowners; however, have options to shed off the weight and keep themselves afloat. One option is known as an FHA Cash-Out Refinance. Before someone can use this new-found strength to swim to shore, it is important to know what this type of refinancing is, any risks that may be involved and ultimately how it can be beneficial. So, let’s take a look and see how homeowners can keep from drowning in their debt.

What is an FHA Cash-Out Refinance?

refinanceEveryone can benefit from having access to extra money to use as they fit. Though many would like to get their hands on those funds, others need that cash and in a hurry! Whether it can be used towards unforeseen medical bills, an addition to the family or have acquired too much debt that it has become suffocating; a need is present that must be resolved. That is where refinancing can help remedy these situations as well as not taking too much time to complete. Though there are several refinancing options available to choose from, not every option fits every situation. To begin with, knowing what an FHA Cash-Out Refinance is a good place to start. This type of a refinance loan takes place when the borrower takes their current mortgage and replaces it with one that is higher. This process works since the money is coming from the equity that has built up in the borrower’s home. Basically, the amount that can be borrowed is based on the equity of the home, basic reductions and the original loan amount. Before getting into the benefits of this type of a loan, there are qualifications that need to be met in order to be eligible. Let us now look at the specifications to see if this life-line will be strong enough to keep homeowners afloat.

Qualifications for an FHA Cash-Out Refinance

As I mentioned earlier, not every person can qualify for this type of refinancing. A borrower must make certain requirements in order to secure this loan. The way this system works is a homeowner must fall into one of two tiers in order to secure an FHA Cash-Out Refinance. One tier awards a maximum of 95% of the value of the home after an appraisal has been completed. The second tier allows a maximum of only 85% of the value of the home once the appraisal has been finished. Since the overall difference between the two is 10%, it is extremely important to understand what needs to be done to qualify for a first tier loan.

The requirements for the first tier loan begins with the home must be either a one-or-two unit dwelling. Prior to applying for the refinance, the owner of the home has to have owned as well as used it for at least 12 months. Lastly, anyone who has signed with the homeowner as a co-signer or a co-borrower must live in said property at the time the loan. Anyone applying who does not meet the requirements will be denied the loan.

Those who fail in securing a tier one refinance should not think that all is lost. After all, there is still a chance to qualify for a second tier loan. To begin with, the home in question can be a single unit or a multifamily home with up to four units. At the time of the application, the person in question must have owned the home as well as using it as their primary residence for at least 12 months. However, if said property was owned less than the 12 month period, the maximum amount allowed would be 85% of the appraised home. Also, if the home was inherited within the last year through an estate preceding the loan application, the new owner can now receive up to 85% of the home’s appraisal. Now that we have talked about the basic requirements, it is time to take a look at the benefits that cover this type of a loan.

Benefits of an FHA Cash-Out Refinance

Once it is determined that the borrower can qualify for this type of a refinance, it is important to see if the benefits are worth securing the loan. To start off with, there are no FICO score requirements. For those who have bad credit, usually a poor score would deny a borrower from receiving a loan. With this type of a loan, a poor score would not be used against him/her. Instead of having to specify how you plan on using the loan, none are needed and you can spend it any way you wish. Another advantage is the rate on some loans would be high and could have the borrower paying back not only the amount of the loan but the high interest rate that could be thousands of dollars! This loan would have low rates, so the homeowner does not have to worry about paying back an extra amount due to high rates. For anyone who has filed for bankruptcy or after defaulting on a previous loan, there is still hope as this type of a refinance can help those after filing for bankruptcy after two years or after three years of receiving a notice of a default.

Today’s economy is said to be in a state of a recovery while others say it is declining. Regardless of what state it is, many people are struggling to survive. Some may be fortunate to be living in a shelter while others are forced to live on the streets. For a homeowner who is fighting to keep their home, there are options available. While there are types of loans that borrowers would not be qualified for, other options do exist. One choice can be going with an FHA Cash-Out Refinance loan. In finding out if this choice is the right one for you; one must look to see what this type of a loan is. After understanding its’ purpose, the next logical step is to look at what are the requirements needed to take out this refinance. Of course, before signing the paperwork it is important to make sure the benefits are worth going through finally securing this loan. Hopefully, this type of a refinance can help become a life-line to those drowning in their debt.

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