What the Heck is a FACOP Loan? An Experienced Industry Veteran Explains

You’ve heard of a FACOP loan, but what the heck is it? Is it legitimate? We’ll explain what this loan is, who it’s best for, and the basic eligibility criteria.

What is a FACOP Loan?

FACOP stands for Federal Assistance Cash Out Program, which is a term used by some mortgage lenders to refer to an FHA cash out refinance. Personally, I haven’t run across even a single lender that uses the term FACOP, but there may be lenders that do.

Though HUD and FHA don’t officially use the terms Federal Assistance Cash Out Program or FACOP, it’s still a great mortgage product for many homeowners.

The FACOP program enables you to refinance your existing mortgage balance with a larger loan and take the difference (minus closing costs and escrow deposits) as cash at closing. You can use the cash for whatever you like. Homeowners commonly use the proceeds to:

• Consolidate debt and reduce monthly expenses
• Home improvements and repairs
• Pay off medical, dental, or vet bills
• Pay for college tuition and expenses
• Invest in a business

The FACOP program is best-suited for homeowners with more than a 20% equity position in their homes and at least fair credit scores (in the 600s or higher).

If you have excellent credit, you may want to consider a conventional cash out refinance or HELOC. We’ll cover those and some other possible alternatives to a FACOP loan shortly.

FACOP Loan Eligibility Criteria

The FACOP loan is a great option for many homeowners because the qualifying requirements are less stringent compared to other types of cash out mortgages, including HELOCs, home equity loans, and conventional cash out refinances.

Here’s a rundown of the basic FACOP loan eligibility requirements:

• Credit scores – The official minimum qualifying credit score is 500, but most lenders will require scores of at least 600 or 620.
• Occupancy – You must currently live in the home and have lived in it for at least the prior twelve months. If you inherited the home, the 12-month rule doesn’t apply as long as you’ve never used the home as a rental. The lender will require employment documentation and/or utility bills to prove occupancy.
• Mortgage payments – All payments on all mortgages on your credit must have been made on time for the last twelve months. If you have a past forbearance, then the forbearance must be complete and you must have made at least twelve mortgage payments on time since the forbearance ended.
• Maximum loan-to-value – The maximum loan-to-value of the new mortgage is 80%. That means you must currently owe significantly less than 80% of your home’s value to get cash out.
• Maximum loan amount – The combined mortgage amount of the new mortgage and any secondary liens (such as a HELOC or home equity loan) cannot exceed the Nationwide Mortgage Limit.
• Debt-to-income ratio – The standard debt-to-income ratio for all FHA loans is 43%. In other words, all debt payments and mortgage payments (including taxes, insurance, and any HOA dues and mortgage insurance premiums) cannot exceed more than 43% of your total monthly gross income. There is some leeway to exceed 43% with compensating factors, such as documented reserves, excellent credit, etc.

There is some flexibility with some of these guidelines, depending on the lender. Most lenders use an automated system to underwrite your loan file. If your loan file doesn’t meet the above qualifications, it is “downgraded” to a manual underwrite. Theoretically, this means the lender’s underwriter can evaluate your loan file manually and potentially approve it. However, many lenders don’t offer a manual underwrite, which means your loan file will be declined if it’s not approved by the automated underwriting system.

Mortgage Insurance Refund

If you’re refinancing an existing FHA mortgage into a new FACOP loan, you may be entitled to a refund on the Upfront Mortgage Insurance Premium (UFMIP) you paid on your current loan.

The refund amount varies depending on how long you’ve had your existing loan, but as long as you’ve been in your current loan for less than 3 years, you’re likely entitled to at least some refund.

Current Interest Rates

Want to see more options? Check all mortgage rates here

FACOP Program Alternatives

If you’re not sure a FACOP refinance is right for you, you may want to consider these alternatives:

• HELOC – A HELOC enables you to tap into home equity at your convenience on a revolving basis. The payments are typically interest-only, which keeps them low, but you’ll need to make extra principal payments to pay the debt down. HELOC rates are usually variable and you’ll likely need at least decent credit and substantial equity in your home to qualify. You do not need to refinance your existing mortgage to get a HELOC; most HELOCs are written as second mortgages behind an existing mortgage. Click here to check out today’s HELOC interest rates.
• Home equity loan – Home equity loans are a fixed-rate alternative to a HELOC. You borrow one lump sum and pay it back with a fixed interest rate over a set loan term. You’ll likely need at least decent credit and substantial equity in your home to qualify. You do not need to refinance your existing mortgage to get a home equity loan; most home equity loans are structured as second mortgages behind an existing mortgage. Click here to check out today’s home equity loan rates.
• Conventional cash out refinance – If you have strong credit scores, you may want to consider a conventional cash out refinance. Conventional (non government-insured) mortgages have the advantage of not requiring mortgage insurance if the loan amount is less than 80% of the value of the home. A variety of loan products are available, including the 10/1 ARM, 7/1 ARM, 5/1 ARM, and 10-, 15-, and 30-year fixed products. Check out current conventional refinance rates here.
• Home equity agreement – A home equity agreement is a unique home equity solution that enables you to convert home equity into cash with no monthly payments and zero interest charges – even if you have less than perfect credit. Not available in all states. Find out more about the home equity agreement here.
• HECM Reverse Mortgage – If you’re at least 62, a HECM reverse mortgage enables you to convert home equity into cash without a mortgage payment and without giving up ownership of your home. No mortgage payments are required as long as at least one borrower (or non-borrowing spouse) lives in the home and pays the required property charges. You remain the owner of your home and you’re free to leave it to your heirs. Find out more about a HECM here.

Frequently Asked Questions