What is the FHA cash-out refinance?
The FHA cash-out refinance lets you refinance up to 80% of your home’s value in order to cash out your equity.
Like other cash-out loans, FHA cash-out refinancing works by taking out a larger loan than what you currently owe on the home. You use this to pay off the existing loan, then pocket the difference as cash at closing.
FHA cash-out loans allow lower credit scores and more flexible debt ratios than other cash-out programs. That means homeowners can access their equity even without great credit.
In this article (Skip to…)
- Maximum LTV
- Maximum cash-out
- Loan limits
- Cash-out refinance calculator
- FHA interest rates
- Conventional vs. FHA
- Best cash-out ruses
- FHA cash-out FAQ
>Related: Explore cash-out refinance options
About the FHA cash-out plan
The FHA cash-out plan — or “FHA cash-out refinance” — is a refinance loan backed by the Federal Housing Administration. It lets homeowners borrow against their equity by taking out a new mortgage loan that’s bigger than their existing loan. The difference between your existing loan and your new one is the amount you cash out at closing.
Any homeowner can apply for the FHA cash-out plan; you don’t need an existing FHA loan to qualify. And credit requirements are looser than for a conventional cash-out refinance.
FHA cash-out refinance requirements
Borrowers applying for an FHA cash-out refinance need to meet standards set by the Federal Housing Administration. Exact requirements can vary by lender, but homeowners always need to meet the FHA’s minimum guidelines.
To qualify for an FHA cash-out refinance, you must have:
- A credit score of at least 600 (with most lenders)
- A debt-to-income ratio below 43%
- More than 20% equity in the home
- On-time mortgage payments for the past 12 months
In addition, the home being refinanced must be your primary residence. And you must have lived in the home at least 12 months prior to applying for an FHA cash-out loan. Lenders will ask for employment documentation or utility bills to prove you’ve occupied the home as your primary residence for the past year.
Qualifying borrowers can apply for the FHA cash-out refinance even if their existing mortgage is conventional or another loan type.
Regardless of the type of loan you have now, using the FHA cash-out refinance will result in mortgage insurance premiums (MIP) on your new FHA loan.
However, FHA refinance rates are often lower than conventional. So for many homeowners, mortgage insurance is a fair tradeoff for cash-back and a new, lower rate.
FHA cash-out refinance maximum loan-to-value ratio
The maximum loan-to-value (LTV) for an FHA cash-out loan is 80 percent. That means after the cash-out has been subtracted, you must still have 20% equity leftover in your home. So you’ll need substantial home equity for a cash-out refi to be worth it.
Mortgage lenders calculate LTV using your current mortgage and your home’s re-appraised value.
Generally, the FHA cash-out refinance is best for homeowners who are sitting on lots of home equity but don’t have a high enough FICO credit score to use a conventional cash-out refi.
How much cash back can I get with FHA?
The max amount of cash you can get using an FHA cash-out refinance is dictated by your home equity.
Remember, you must leave 20% equity in your home after the cash-back is withdrawn. So, when thinking about the amount of cash you can take out, look at your total equity and subtract 20% — plus closing costs — to get an estimate.
Here’s an example of how the FHA cash-out calculation works:
|Current Home Value||$220,000|
|Current Loan Balance||$140,000|
|New FHA Loan (max 80% of value)||$176,000|
|Payoff Current Loan||-$140,000|
|Subtract Closing Costs||-$3,000|
|Maximum FHA Cash-Out||$33,000|
In this example, the home is worth $220,000, and the homeowner only owes $140,000 on their mortgage. So they have $80K worth of home equity.
However, 20% of the home’s value must remain untouched.
- 20% of $220,000 is $44,000
- So $44K must be subtracted from their total $80K equity
- This gives a max cash-out potential of $36,000
However, the homeowner also uses some of their cash-out value to pay closing costs ($3,000).
So they end up with a total of $33,000 cash-back at closing — quite a bit lower than the $80K of equity originally calculated.
FHA cash-out refinance loan limits
FHA allows a loan-to-value ratio of up to 80% when using the cash-out refinance program. That means your new loan can be up to 80% of the home’s appraised value.
However, the new mortgage must be within the FHA loan limits for your area. If your home value has appreciated significantly since you bought it, your cash-out loan amount may be capped by FHA loan limits.
In most areas of the country, the maximum FHA loan limit is $ for 2022. However, maximum loan amounts go up to $ for one-unit homes in high-value real estate markets like Los Angeles, California, and New York, New York.
You can find your local FHA loan limits here.
FHA cash-out refinance calculator
Curious about how much you can borrow with an FHA cash-out refinance? You can calculate your own cash back value by downloading and filling out this free calculator template in Google Sheets.
FHA cash-out refinance rates
FHA rates are low — even lower than conventional loan rates, in fact.
According to loan software company ICE Mortgage Technology, FHA fixed rates average about 10 to 15 basis points (0.10-0.15%) below conventional rates on average.
This is due to FHA’s strong government backing. Lenders can issue these loans at lower risk.
However, borrowers need to consider FHA mortgage insurance, which raises the “effective” FHA rates as follows:
|FHA Cash-Out||Conventional Cash-Out|
*Sample rates only. May not be currently available
FHA cash-out loans may come with higher rates than standard FHA loans. Check around with various lenders to find the best rate.
Conventional cash-out refinancing vs. FHA cash-out
The big advantage of using an FHA cash-out refinance over a conventional cash-out loan is that FHA has more lenient credit requirements.
|FHA Cash-Out||Conventional Cash-Out|
|Minimum Credit Score||500 (official), 600-660 (likely)||620 (official), 640-680 (likely)|
|Can Replace Any Loan Type||Yes||Yes|
|Occupancy||Owner-occupied only||Owner, 2nd home, rental|
Technically, you can get an FHA cash-out loan with a FICO score as low as 500. However, you’re much more likely to find lenders starting in the 580-600 range, and even some as high as 600.
If your credit score is on the lower end of that spectrum, you’ll want to be extra thorough when shopping around for a lender that will approve your refinance and give you a fair rate.
FHA cash-out refinance drawbacks
The primary disadvantage to an FHA cash-out loan is the associated mortgage insurance.
FHA loans require an upfront and monthly mortgage insurance premium (MIP). These fees are as follows:
- Upfront mortgage insurance: 1.75% of the new loan amount upfront (typically included in the loan balance)
- Annual mortgage insurance: 0.85% of the loan amount yearly, paid in 12 installments with the mortgage payment
This is equal to $1,750 upfront and $67 monthly for each $100,000 borrowed. In return for the extra fees, FHA provides more credit score flexibility than conventional loans.
Conventional cash-out refinances do not come with upfront or monthly mortgage insurance.
Also, conventional cash out can be used for second homes and investment properties. FHA must be used on the home you live in.
If you’re not sure which type of refinance is best for your situation, your loan officer can help you compare options and loan terms to make the right choice.
Best uses for the FHA cash-out refinance
With an FHA cash-out loan, you can pay off any loan type, plus take equity out of your home in the form of a check or have it wired to an account of your choice.
You can use those funds for any purpose. Some popular uses for cash-out funds include:
- Home improvement projects
- Credit card debt consolidation
- Auto loan payoff
- Student loan refinancing
- Prepay college tuition
- Consolidate a first and second mortgage
- Pay off other high-interest debts at a low fixed rate
- Refinance from an adjustable-rate loan into a fixed-rate loan
There is almost no limit to what you can use the money for. Homeowners who want to reduce monthly payments on other debt, or just have a little extra cash in the bank, should examine this loan type.
FHA cash-out refinance alternatives
An FHA cash-out refinance isn’t the only way to access your home equity. For many homeowners, one of the following options could be a better choice:
- Home equity loan: A home equity loan lets you borrow against the equity in your home without refinancing. You receive a lump sum of cash that you’ll pay off with monthly installments towards the principal and interest until the loan is paid in full
- HELOC: A home equity line of credit (HELOC) also allows you to borrow against your home equity without a refinance. But because it’s a revolving line of credit — much like a credit card — you only borrow what you need during the loan’s draw period, which is often 10 years. During this time, you only pay interest on what you borrow. Keep in mind both a HELOC and a home equity loan use your house as collateral. So if you are unable to make monthly mortgage payments, you risk foreclosure of your home
- Conventional cash-out refinance: If you have a DTI ratio under 50%, an LTV ratio below 80%, and a FICO score of 620 or more, a conventional cash-out may be ideal. With this loan you will not be required to pay mortgage insurance
FHA cash-out refinance FAQ
The official FICO credit score minimum for all FHA loans is 500. However, a realistic minimum that lenders will actually allow is somewhere between 600 and 660 or higher. This is because lenders often set higher minimums than does FHA. If one lender can’t do your loan, keep looking until you find one with more lenient standards.
It is possible to get a cash-out refinance with fair credit. The FHA cash-out program will be your best chance at getting approved. Most cash-out loans such as conventional or home equity loans require good credit. But FHA may allow you to be approved with a credit score in the low 600s or even the high 500s.
Yes, FHA requires a new appraisal to determine the current market value of the home. The lender will calculate the LTV on your new mortgage loan based on the home’s recently appraised value.
FHA used to allow a maximum 95 percent cash-out refinance prior to April 1, 2009. It then reduced the LTV limit to 85 percent. Then, on September 1, 2019, it was lowered again to 80 percent. FHA lowered its cash-out refinance limits to make lending more secure. The more equity you’re required to leave in your home, the less a lender stands to lose if the mortgage ever defaults.
Only the VA loan program offers a 100 percent cash-out refinance option. VA loans are restricted to veterans and active-duty military members. Those with qualifying service history will typically find the VA cash-out refinance to be a better deal than the FHA cash-out loan.
The cash available depends on your home’s current value, your existing loan, and, for FHA cash-out refinances, current FHA loan limits. There’s no stated limit to the amount of cash you can take. You can get a new loan up to 80 percent of the home’s current value and are entitled to any amount of cash that yields.
A cash-out refinance is a debt, not income. Therefore, it’s usually not taxable as income. However, consult a tax advisor before filing.
In order to use the FHA cash-out refinance, you must have lived in the residence you’re refinancing for at least 12 months. In addition, you must have paid all your mortgage payments for the past year within the month they were due.
Equity loans usually refer to a home equity line of credit or home equity loan. These are second mortgages that are placed on top of an existing primary mortgage. These types of loans are not available via FHA. An FHA cash-out refinance would be the closest thing. If you have an FHA loan currently, you could potentially get a standard home equity loan through a bank or local credit union. This would require good credit and decent equity in the home.
FHA loans require a DTI of 43 percent or less, unless significant compensating factors are present, such as a high credit score or lots of equity in the house. In these cases, a DTI of up to 50 percent is possible. DTI is the portion of your future housing and other debt payments compared to your pre-tax income. For instance, if your income is $7,000 per month, a 43 percent DTI would be $3,000. In this example, you could have a $2,000 house payment and $1,000 combined payments for a car, student loans, or other debts.
You may not add any borrower to the loan who does not live in the home. These are known as “non-occupant co-borrowers,” and are not allowed for cash-out loans.
Generally, you can’t add a second mortgage to the FHA cash-out loan unless both loans add up to 80 percent of the home’s value or less. However, you may be able to keep an existing second mortgage and subordinate it under the new FHA loan. Subordinating involves receiving a document from the second mortgage lender stating it’s okay to get a new first mortgage.
You may have received a notification from a lender stating that you haven’t tapped into your FHA equity reserves. This is a marketing gimmick that is trying to entice you to refinance via an FHA streamline refinance. This is likely referring to the FHA mortgage insurance refund you are entitled to when replacing one FHA loan with another via an FHA streamline refinance. Cash-out is not allowed when you get an FHA streamline refinance, however, you may save on your monthly payment. Only the FHA cash-out refinance allows you to receive cash back at closing.
Check your FHA cash-out loan eligibility
Homeowners who don’t have great credit but need to tap home equity are the best candidates for FHA cash-out loans.
If you’re interested in an FHA cash-out refinance, be sure to shop around with a few lenders and find the best rate for your new loan.