• An FHA cash-out refinance replaces your current mortgage with a new FHA loan of a higher amount, allowing you to pocket the difference (after paying any upfront costs).[1]
  • FHA cash-out refinancing works best when you can secure a lower interest rate than the rate on your existing mortgage and cannot qualify for comparable terms under a conventional cash-out refinance.[1]
  • If an FHA cash-out refinance isn’t the right option for you, you might consider a conventional cash-out refinance, a home equity loan, or a home equity line of credit (HELOC) as an alternative means of borrowing against your home equity.[1] 

If you’re considering converting some of your home equity into funds while adjusting the terms of your existing mortgage, an FHA cash-out refinance may be a suitable option for you. 

In this article, we’ll explain what an FHA cash-out refinance is, how it works, what it costs, and when it makes sense compared to other options.

What Is a FHA Cash-Out Refinance?

An FHA cash-out refinance is when you replace your existing mortgage with a FHA loan of a larger amount. This FHA loan is partially insured by the Federal Housing Administration, which reduces the risk for mortgage lenders and allows them to offer home loans to those who might not qualify for a conventional, non-government-backed loan.[1]

After using the new loan to pay off the previous loan balance (plus any closing costs and/or fees), you have access to the remaining funds. These funds may be used for a number of purposes, depending on your goals, such as financing home renovations, paying off higher-interest debts, or covering large expenses.    

You do not have to have an FHA loan to get an FHA cash-out refinance.[1] You could, for example, refinance an existing conventional loan with an FHA cash-out refinance. The primary benefit of refinancing with an FHA loan compared to a conventional loan is the more lenient credit score requirement. Some homeowners who don’t qualify for a conventional cash-out refinance based on credit history may still qualify for an FHA cash-out refinance. 

How Does an FHA Cash-Out Refinance Work?

With an FHA cash-out refinance, qualified homeowners may borrow up to 80% of the property’s value (known as the loan-to-value (LTV) ratio).[1]

For example, imagine your home is worth $500,000 (as evidenced by a home appraisal), and you have a $300,000 balance on your current mortgage. With an FHA cash-out refinance, you could potentially borrow up to $400,000. After paying off the $300,000 mortgage balance, you would have $100,000 available. Some of those remaining funds might go toward closing costs on the new loan (if you choose to pay the costs upfront rather than rolling them into the new loan). You could then cash out the additional funds and use them to accomplish your financial goals.

Because your previous mortgage is paid in full by the new FHA loan, you no longer have mortgage payments for that loan. Instead, you’ll begin payments on the new FHA loan. 

The new FHA mortgage payments may be higher due to the larger loan balance. It’s also important to note that FHA loans require mortgage insurance, which may increase the cost of the loan.[2] However, if you are able to secure a lower interest rate through the refinance, the reduced interest expense may help offset any increase. 

It’s also worth noting that you do not need to borrow the maximum available amount. Borrowing only what you need may reduce closing costs, interest expenses, and other fees. 

Eligibility and Requirements

Eligibility criteria may vary by lender, but borrowers typically need to meet the following requirements to qualify for an FHA cash-out refinance:[1]

  • Acceptable credit scores. Many lenders require a score of 600 or higher to qualify for an FHA cash-out refinance.  
  • Sufficient home equity. Borrowers need to have enough home equity to pay off the current mortgage balance (plus any closing costs), cash out the amount they need, and still have at least 20% equity remaining in the property. 
  • Solid mortgage payment history. Late mortgage payments within the past year could potentially disqualify a borrower from refinancing. 
  • Acceptable debt-to-income (DTI) ratio. DTI measures a borrower’s debt obligations as a percentage of their pre-tax income. While DTI requirements may be flexible depending on other factors like LTV and credit score, borrowers may want to keep monthly debt payments below 36-40% of their monthly income.    
  • Own the property as a primary residence. FHA loans are intended for owner-occupied properties rather than rental properties, so the borrower typically needs to live in the home. There is an exception for inherited or gifted properties; however, if the recipient has used the property as an investment (by renting it out, for example), they typically need to reestablish primary residency by living on site for 12 months.[3]

Common Costs Associated with an FHA Cash-Out Refinance

An FHA cash-out refinance may include the following costs:

  • Closing costs. Vary by lender, but may total 2-6% of the loan amount.
  • Upfront mortgage insurance premium (UFMIP). 1.75% of the loan amount, as required by the FHA.[2]
  • Annual mortgage insurance premiums (MIP). Varies by LTV and loan term, but could be .45-1.05% of the loan balance each year.[2]
  • MIP is typically paid through your monthly mortgage payments. Closing costs and UFMIP may be paid out-of-pocket when closing the new FHA loan, or they may be rolled into the loan if your lender allows. 

When an FHA Cash-Out Refinance May Not Be the Right Fit

An FHA cash-out refinance might not be possible or ideal in the following situations:

  • If you cannot secure a lower interest rate than the rate on your current mortgage. A higher interest rate adds greater interest expense to your mortgage payments and overall cost of the loan. Rather than refinancing your primary mortgage, you might wish to add a second mortgage (like a home equity loan or HELOC) to access the funds you need. 
  • If you have a strong credit score and financial profile. In this case, a conventional cash-out refinance may be more cost-effective.   
  • If you plan to sell the home in the near future. The cost of the refinance might not be worth it if you plan to sell soon. 
  • If the property is not your primary residence. You must typically live in the property for it to be eligible for an FHA loan.
  • If you want to borrow more than FHA limits allow. FHA loan limits vary by market. If you plan to borrow more than FHA loan limits allow, you may need a conventional loan or a jumbo loan. 

Comparing FHA Cash-Out Refinance Against Other Options

If an FHA cash-out refinance is not the right fit for you, you might consider one of the following alternatives:

  • Conventional Cash-Out Refinance. More versatile than FHA cash-out refinancing, conventional cash-out refinances can accommodate higher loan amounts and investment properties. For homeowners with strong credit and financial profiles, this option may also be less expensive overall than an FHA cash-out refinance.  
  • Home Equity Loan. Home equity loans allow you to borrow a lump sum against your equity without changing the terms of your primary mortgage. This may be helpful if your current mortgage has a lower interest rate than you could get today.  
  • HELOC. Like a home equity loan, a HELOC allows you to borrow against your home equity without altering your primary mortgage. Unlike a home equity loan, HELOCs are revolving credit lines, allowing you to borrow incrementally as needed throughout the 5-10-year draw period.   

 

How To Apply for an FHA Cash-Out Refinance 

To apply for an FHA cash-out refinance:

  • Estimate your home equity to see if you have enough to stay within the FHA’s 80% LTV limit.
  • Check your credit score and compare your monthly debt payments to your income to understand your current financial profile.
  • Compare FHA-approved lenders for rates, fees, and loan terms.
  • Gather the required documents, including proof of income, bank statements, and proof of residence.
  • Apply for an FHA cash-out refinance.
  • Complete the FHA home appraisal ordered by your lender.
  • Go through underwriting for final approval.
  • Close on the loan and receive your funds.

The entire process can often be completed in 30-45 days. 

FHA Cash-Out Refinance FAQs

Can You Do an FHA Cash-Out on a Free and Clear Property?

When you own a home free and clear, there isn’t technically a mortgage to refinance. However, you can borrow against your equity by taking out an FHA mortgage against that property, essentially accomplishing the same goal as an FHA cash-out refinance.

Can You Get Money Back on an FHA Loan?

Under a standard rate-and-term or streamlined FHA refinance, borrowers can only “cash-out” up to $500. However, with an FHA cash-out refinance, borrowers may qualify to borrow up to 80% of the property’s value, keeping whatever amount is left over after paying off the existing mortgage and any upfront closing costs. 

What Is the Cash-Out Ratio for FHA?

Homeowners may cash out up to 80% of the home’s value through an FHA cash-out refinance. 

Apply for Your Refinance Today

An FHA cash-out refinance may be a useful tool to access home equity, but it’s important to weigh the requirements, potential costs, benefits, and alternatives first. Take time to review your home’s equity, credit profile, and overall financial goals before seeking pre-qualification or speaking with an FHA-approved lender.

To learn more about FHA cash-out refinances and alternatives, contact a Home Lending Professional today by calling 1-855-744-2668.