How Do Home Equity Loans Work
Applying for a home equity loan is similar to applying for a mortgage. Whether you apply online or in person, you should be prepared with the following information and documentation:
- Your Social Security number
- Home insurance declarations
- Documentation of existing liens on your home, if any
Your combined loan to value ratio , credit score, payment history, and income determine how much you can borrow and your available interest rate. Home equity loans typically have a set repayment term and fixed interest rate for the life of the loan, although you may occasionally find a home equity loan with a variable interest rate.
You can expect to pay origination fees and closing costs as with a mortgage. You may also be subject to late fees for delayed monthly payments or prepayment penalties if you pay off the loan before the term is over. Reviewing the loan offer carefully and asking questions can help you plan for the necessary fees.
The entire process can take about two to six weeks from the time that you apply to when you receive funds. You can usually expect online lenders to be faster than traditional banks and credit unions.
The underwriting process takes up the majority of this time as an underwriter compares your borrowing history, creditworthiness, and financial documentation to the requirements of your loan. When underwriting is complete, youll close the loan by meeting with your lender to sign paperwork and arrange for funds disbursement. Closing can take about a week.
What Is A Mortgage Refinance
A mortgage refinance is taking out a new mortgage loan to replace your existing one. The new mortgage pays off the entirety of the first mortgage and then your new monthly payments will go towards paying off the new loan. Note that a refinanced mortgage is not the same thing as a second mortgage.
To refinance your mortgage, youll need to go through many of the same steps that are involved in getting a standard mortgage. In most cases, you can choose to get a refinance with your current lender or with a new one. The lenders involved will handle most of the work, so you wont have to worry about transferring funds between them.
Once the process is complete, youll continue making monthly payments, but they will go towards the new mortgage. From your end, little about the process will change except the monthly payment. The mortgage refinance rates and terms will dictate whether the new payment is higher or lower and how many years it will take to pay off the new loan.
The benefits of refinancing your mortgage include:
- Saving money in interest with access to the lowest refinance rates
- Changing your monthly payment
- Enabling you to take advantage of the equity in your home
In addition to looking for the best refinance mortgage rates, you can also change the terms . If you want a lower monthly payment, you can refinance with a longer-term loan. On the flip side, if you want to pay the loan off as quickly as possible, you can refinance with a shorter-term loan .
Fannie Mae Suspends 6 Month Waiting Period For Cash
Selling Guide no financing was obtained under the following parameters
The purchase transaction was an arms-length transaction.
The purchase transaction is documented by the HUD-1, which confirms that no mortgage financing was used to obtain the subject property. The preliminary title search or report must also confirm no liens on the subject property.
The source of funds for the purchase transaction can be documented . Any loans used as the source for the purchase transaction will be required to be repaid on the new HUD-1.
All other cash-out refinance eligibility requirements are met and cash-out pricing is applied.
In addition, the multiple financed property policy is being updated to allow cash-out refinances that meet the delayed financing exception.
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Minimum Credit Score Of 640 To 680
Your credit score has a big impact on whether youll qualify for a cash-out refinance. Minimum credit score requirements depend on several factors:
- Investors with one rental unit: Borrowers with a debt-to-income ratio of 36% or less and an LTV of 75% will need a credit score of at least 660. The requirement increases to 680 or higher for borrowers with a DTI of 45% or less.
- Investors with two to four units: Borrowers may need a credit score of up to 700, depending on their LTV ratios.
What Is Delayed Financing
Investors are normally required to wait six months before refinancing a rental property.
However, the delayed financing exception allows real estate investors who originally purchase a rental property with cash to do a cash-out refinance within a few days of closing on the all-cash purchase.
There are four general guidelines for delayed financing of a rental property that was purchased using cash:
- Investors must have paid for the property in cash.
- Any existing liens or loans on the property must be paid off when the property is refinanced.
- Lender must conduct a title search on the property to verify the borrower did not use financing when the property was first purchased.
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Home Equity Loan Vs Home Equity Line Of Credit
Home equity loans and home equity lines of credit are similar, but have a few key differences. Both loans use home equity as collateral for the loan. However, home equity loans provide you with a lump sum of cash, repaid over a set term with a set interest rate. You repay the money over the lifetime of the loan. Terms generally range from 5 to 15 years.
With HELOCs, you get access to a revolving line of credit with a variable interest rate, though some lenders do offer fixed-rate options. Like a credit card, you can take what you need up to your credit limit, pay it back, and borrow more. HELOCs have a draw period, which typically lasts 5 to 10 years. The draw period is followed by a repayment period of about 10 to 20 years, during which you must repay your balance and can no longer draw money.
Ownership Must Be Transferred From The Llc To The Individual
Many investment properties are under the legal ownership of an LLC, or Limited Liability Company. Holding properties in an LLC provides a variety of benefits for investors, but most importantly it separates your personal wealth from the assets of the business.
If you want to refinance using a Fannie Mae cash-out on an invest property, youll need to transfer it from the LLC to your own personal ownership. Essentially, Fannie Mae is not involved with LLC-based transactions they focus largely on owner-occupied homes, as well as a few second homes, such as vacation properties.
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What Is The Cash
Whether youre doing a rate-and-term refinance or a cash-out refinance, the process is generally the same. The primary difference is that a cash-out refinance on investment property usually requires an appraisal that sometimes costs $150 more than a home appraisal on a primary residence. A cash-out refinance will also cap closing costs at 3% of the new loan amount.
After completing the loan application and your loan gets approved, you can usually close within 30-45 days with a cash-out refi on investment property. After a 3-day waiting period, youll receive your cash. For a more detailed step-by-step process, read How to Refinance an Investment Property.
How To Evaluate Your Homes Equity
You can figure out your homes equity by subtracting the amount you owe on your mortgage from your homes appraised value. That formula looks like this:
Current home appraisal value mortgage balance = home equity
For example, lets say you want to get a $50,000 home equity loan and the current market value of your home is $300,000. You have a 30-year mortgage with a remaining balance of $180,000. $300,000 minus $180,000 equals $120,000. You currently have $120,000 in home equity, 40% of your homes total appraised value.
Lenders also review your loan-to-value ratio and CLTV ratio. When you already have an existing mortgage, your LTV compares your mortgage balance to the appraised home value. In our example, your LTV ratio would be 60%. That equation looks like this:
x 100 = LTV ratio percentage
Determining your CLTV ratio can help you see if you meet the 85% maximum required by most lenders. To determine CLTV, add the desired loan amount to your current mortgage balance, then divide that number by the current appraised value. Finally, multiply by 100 to turn that number into a percentage:
/ home appraisal value x 100= CLTV ratio
In our example, you would add $50,000 to $180,000, then divide that number by $300,000. Multiply by 100 to get a 77% CLTV ratio, which most lenders would approve.
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How Much Money Can I Get Out
There are many factors that we consider including the total amount of the loan, the value of your home, your credit score and more. We will typically look at a loan-to-value ratio to help determine the cash out amount. This is a percentage that compares the amount of your current mortgage with the appraised value of the property. If you want to see how much cash your home equity could provide, try our cash-out refinance calculator.
Can Proceeds From A Cash
Cash proceeds from a cash-out refinance transaction on the subject property are an unacceptable source of reserves. Refer to B3-4.1-01, Minimum Reserve Requirements for additional information.
For information on using borrowed funds secured by an asset on other real estate owned, see B3-4.3-15, Borrowed Funds Secured by an Asset.
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Fannie Mae Cash Out Seasoning
Fannie Mae cash out seasoning after purchasing a home can vary by lender. If a lender goes by Fannie Mae guidelines, the seasoning requirements are as follows:
You may be eligible for a Fannie Mae cash out refinance with a conventional loan if the property was purchased at least six months prior to the disbursement date of the new mortgage. Exceptions to the mortgage seasoning requirements are:
- If the property was acquired through inheritance or legally awarded, such as separation, divorce, or dissolution of a domestic partnership.
- Proper documentation is needed.
Some lenders can have tougher seasoning requirements when it comes to cash out refinances due to not follow Fannie Mae guidelines.
Fnma Tx Mortgage Basics
- 15 year, 20 year, 25 year, or 30 year fully amortizing fixed
- No adjustable rate mortgages
- 620 minimum qualifying credit score
- 1 Unit primary residence located in the State of Texas
- Property types include stick built homes , approved condos, Planned Unit Developments, and approved manufactured housing
- Borrow up to 80% of the value of the home
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Fannie Maes Delayed Financing: Pay Cash For Your Home Today Then Cash
Delayed Financing is a cash-out refinance option that can begin as early as one day after paying cash for a Primary, Second Home, or Investment property? In competitive markets, listed homes may only be available for a few daysmaybe only hours. Buyers need to make solid offers and deliver on agreed terms. Being a cash buyer allows you to do just this.
The Delayed Financing option is a Fannie Mae rule and has been available since 2011. Before delayed financing, cash buyers, homeowners, and real estate investors had to wait 6 months before beginning the cash-out refinance process. Today, the delayed financing option can begin immediately, and The Mortgage Network can help you close on these transactions in as little as 30 days from the date of purchase.
Delayed Financing Advantages:
- Sellers favor a cash offer over just about any other offer
- Offers from cash buyers are more often accepted than offers requiring traditional financing
- Stronger negotiating power
- Creates an opportunity to draw upon financial assets, such as retirement and savings funds, with the option to quickly restore these assets through a delayed financing cash-out refinance in as little as 30 days of closing on the original purchase
Guidelines when considering delayed financing:
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How To Choose The Right Mortgage Refinance Lender With The Best Rates
These tips can help you find the best refinance rates for your home loan:
- Check your credit. If your score needs improvement, take steps to give it a boost before you apply so you can get the lowest refinance rates. Paying down debt will also lower your debt-to-income ratio, improving your chances to qualify for affordable refi rates.
- Get quotes from multiple lenders. Home refinance rates can be very different across different banks and lenders. If you skip shopping around, you could spend hundreds more on your monthly mortgage payment.
- Review your mortgage disclosure. To get the lowest refinance rates, some lenders recommend that you purchase points, or pay a portion of the interest upfront with your closing costs. If you take this route, do the math to make sure you will actually save money after you buy down your refinance rate.
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What Are The Tax Implications If I Get A Cash
The cash you receive from your cash-out loan is not viewed as taxable income by the IRS. However, when using the money you receive from your cash-out loan, there are certain things to keep in mind for when you file your tax returns. Typically, if the money is being used for anything home-related , the interest you pay on it might be deductible. This is because the IRS includes improvements that increase the value of your property as an interest tax-deductible option. On the flip-side, if you are using the money for other things such as paying credit card debt, putting into savings, or taking a trip, the interest is not tax-deductible. You can find more information from the IRS in this publication.
This information is provided for general informational purposes and should not be relied upon as tax or financial advice. Please contact your accountant or financial consultant if you have specific questions about the money you take out for a cash-out refinance loan.
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Wouldnt It Be Better To Just Use My Credit Cards For Major Projects
No! You may think youre earning rewards or benefits by putting large debt on your credit card, but its going to cost you significantly more in variable interest rates, high APR, fees, unfavorable terms, etc. If you carry too much debt on a credit card, it can hurt your credit score due to a high credit utilization rate. A cash-out refinance is one of the smartest ways to borrow money because of its low interest rates. Plus, it allows you to create a consistent monthly payment that you know you can afford and pay back over time.
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Waiting Period Of 6 Months After Home Purchase
You can use the proceeds from a cash-out refinance for just about anything. But you wont be able to complete the transaction until youve owned the property for at least six months.
Exceptions apply if you inherited the property or it was legally awarded to you in a divorce or separation. If you do qualify for an exception, then your maximum LTV will be capped at 70% no matter how many units you own.
Stash Away Emergency Cash
Financial experts typically recommend keeping three to six months worth of expenses in savings though you may want to save more if you own rental units. This can help you keep up with your mortgages, pay your bills, and otherwise maintain your lifestyle in case of financial emergencies.
Tapping your equity at a low rate, when you still qualify for the loan, could help you start this fund. Just be sure you can keep up with the higher payments from a cash-out refinance.
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What Is The Seasoning Requirement For A Cash
The property must have been purchased by the borrower at least six months prior to the disbursement date of the new mortgage loan except for the following:
- There is no waiting period if the lender documents that the borrower acquired the property through an inheritance or was legally awarded the property .
- The delayed financing requirements are met. See Delayed Financing Exception in B2-1.3-03, Cash-Out Refinance Transactions.
- If the property was owned prior to closing by a limited liability corporation that is majority-owned or controlled by the borrower, the time it was held by the LLC may be counted towards meeting the borrowers six month ownership requirement. . See B2-2-01, General Borrower Eligibility Requirements for additional details.
- If the property was owned prior to closing by an inter vivos revocable trust, the time held by the trust may be counted towards meeting the borrowers six month ownership requirement if the borrower is the primary beneficiary of the trust.
What Is Required For A Delayed Financing Exception
Delayed Financing Exception
Borrowers who purchased the subject property within the past six months are eligible for a cash-out refinance if all of the following requirements are met. Refer to B2-1.3-03, Cash-Out Refinance Transactions for documentation and other requirements regarding cash-out refinance transactions.
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Am I Eligible For A Va
You may be eligible for this type of loan if you meet all of these requirements.
All of these must be true:
- You qualify for a VA-backed home loan Certificate of Eligibility, and
- You meet VAsand your lendersstandards for credit, income, and any other requirements, and
- Youll live in the home youre refinancing with the loan
