What is an FHA Cash Out Refinance?

This FHA program allows you to refinance a maximum of 80% of the value of your home to cash out its equity.

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The FHA’s cash out refinance, like other types of cash out loans, works by a bigger loan being taken out than what you owe currently on your house. This is used to pay off your existing loan, and then at closing take the difference in cash. 

FHA cash out loans have debt ratios that are flexible and allow for lower credit scores to other types of cash-out programs. That allows homeowners to access the equity in their homes at the current low rates, even if their credit is not great. 

Requirements for the FHA’s Cash-Out refinancing program

Borrowers who apply for the FHA’s cash-out refinance must meet standards that the FHA sets, However the exact requirements may vary by lender.

FHA cash out loan requirements include the following: 

  • At least a 600 credit score 
  • A debt-to-income ratio that is less than 43%
  • Home equity of over 20% equity 
  • The house must be your primary residence 
  • Have lived in your house for at least 12 months 
  • No late mortgage payments over the last 12 months 
  • Provide documented proof of primary residence for the last 12 months 

A cash-out refinance, in contrast to FHA streamline refinance, does not require that your current mortgage has to be an FHA loan. Borrowers who qualify for the FHA’s cash-out refinance even when their current loan is a conventional or another type of loan.No matter what kind of loan you currently have, when the FHA’s cash-out refinance is used, it results in the new FHA loan having mortgage insurance.

However, often FHA refinance rates tend to be lower compared to conventional loans. For many homeowners, it is a fair tradeoff to have mortgage insurance in exchange for a lower, new rate and cash-back.

Max LTV on the FHA Cash Out Refinance 

On an FHA cash-out loan, the maximum LTV (loan-to-value) is 80%. 

That means that after subtracting the cash-out, your home still needs to have 20% equity remaining. So you must have substantial equity in your house in order for a cash-out refinance to be worthwhile. 

The FHA’s cash-out refinance in general is best for those homeowners who have plenty of equity in their homes but don’t have credit scores that are high enough to be able to use a conventional cash-out refinance. 

Limits on FHA Cash Out Refinance Loans 

A maximum 80% LTV is allowed by the FHA when its cash-out refinance program is used. This means a new loan may be a maximum of 80% of the appraised value of your home. 

However, your new mortgage is required to be within the loan limits set by the FHA. If the value of your home has significantly appreciated since you purchased it, then the amount of your cash-out might be capped by the loan limits set by the FHA. 

The maximum limit on FHA loans in most parts of the country for 2021 is $356,362. However, the maximum loan limits on one-unit houses can increase to a maximum of $822,375 in high-value real estate markets such as New York, New York, and Los Angeles, California. 

What amount of cash back can I receive with the FHA’s cash-out refinance?

The maximum amount of cash that you receive through using FHA cash-out refinance will be determined by the equity you have in your home. 

Keep in mind that 20% of your home’s equity must be left once the cash-back has been withdrawn. So when you are considering how much cash you will be able to take out. check the total equity in your home and then subtract 20% along with closing costs to come up with an estimate. 

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Rates on the FHA cash out refinances 

FHA rates right now are low. In fact, they are even lower than the rates on conventional loans. 

According to ICE Mortgage Technology, a loan software company, the FHA’s fixed rates average around 0.10 to 0.15% (10 to 15 basis points) under conventional rates on average. That is due to the strong government backing provided by the FHA. These loans can be issued by lenders at lower risk. However, FHA mortgage insurance needs to be considered by borrowers, which increases the “effective” FHA rates as shown below: 

Conventional Cash-OutFHA Cash-Out
Interest Rate3.25%*3.0%*
Mortgage insurance0%0.80%
Effective rate3.25%3.80%
Sample rates only. Might not be available currently

FHA cash-out loans might have higher rates compared to standard FHA loans. To get the best rates, check with various lenders.

FHA cash-out vs conventional cash-out refinance

The biggest advantage of using FHA cash-out refinance instead of a conventional cash-out loan is that there are more lenient credit requirements from the FHA.

Conventional Cash-OutFHA Cash-Out
Minimum Credit Score620 (official)
640-680 (most likely)
500 (official)
600-660 (most likely)
Maximum LTV80%80%
Can Replace Any Loan TypeYesYes
OccupancyOwner, 2nd home, rentalOwner-occupied only

Technically, an FHA cash-out loan can be obtained with a credit score starting at 500. However, it is much more likely that lenders will start at 580 to 600, and some might start at 600. If you have a lower credit score, you will need to be more thorough when you are searching for a lender who will approve your refinance and offer you a fair rate. 

Drawbacks to the FHA’s cash-out refinance 

The main disadvantage of an FHA cash-out loan is the mortgage insurance associated with it. Both monthly and upfront mortgage insurance premiums are required on FHA loans.

The following are the fees:

  • Yearly mortgage insurance: 0.85% of the annual loan amount, paid in 12 installments along with the mortgage payment
  • Upfront mortgage insurance: 1.75% of the amount of the new loan, paid up front (usually included as part of the loan balance)

For every $100,000 borrowed, this is the equivalent of $67 monthly and $1,750 upfront.

In exchange for extra fees, more credit score flexibility is provided by the FHA compared to conventional loans. There is no monthly or upfront mortgage insurance with conventional cash-out refinances. Also, FHA can only be used on the house that you live in, while conventional loans may also be used for investment properties and second homes. 

Ask your loan officer to help you compare loan terms and options to ensure you make the best choice if you are unsure of which kind of refinance is best for your specific situation. 

Best ways to use an FHA cash-out refinance

An FHA cash-out can be used to pay off any type of loan, and also take equity from your house and have the money wired to your account, or be issued a check. These funds may be used for any reason.

The following are some of the most popular uses of FHA cash out funds: 

  • Consolidate a second or first mortgage
  • Prepay college tuition
  • Student loan refinancing
  • Home improvement projects
  • Payoff car loan
  • Credit card debt consolidation
  • Use a low fixed rate to pay off other types of high-interest debts 

There is practically no limit to what the money can be used for. Homeowners who would like to lower their monthly debt payments or want to have some extra cash should consider this type of loan. 

FAQs on FHA cash-out refinance

What credit score do I need to have to qualify to receive FHA cash-out refinance?

All FHA loans have a 500 minimum official credit score. However, a more realistic minimum score that will actually be allowed by lenders ranges from 600 to 660 or even higher. That is due to the fact that lenders frequently set minimums that are higher than the FHA minimums. If a lender is unable to offer you a loan, keep shopping until you are able to find one that has standards that are more lenient.   

If you have bad credit can you still get a cash-out refinance?

If you have fair credit it is still possible to qualify for a cash-out refinance.  The best to getting approved is with the FHA. A majority of cash-out loans like home equity loans or conventional loans require you to have good credit. However, FHA might allow you to get approved with a high 500 to low 600 credit score. The catch is a majority of lenders set minimum credit scores of their own on these loans.  

Is a new appraisal required by FHA cash-outs?

Yes, a new appraisal is required by the FHA to determine your home’s current market value. The LTV on your new loan will be calculated by the lender based on the recently appraised value of your house.

I thought I heard there are FHA 85% and 95% cash-out refinances?

Before April 1, 2009, the FHA allowed a 95% maximum cash-out refinance. The LTV limit was then reduced to 85%. On September 1, 2019, the FHA reduced again down to 80%. The reason why the cash-out refinancing limits were lowered by the FHA was to make lending even more secure. The more equity that borrowers are required to leave in their houses, the less that a lender will lose if the borrower defaults on their mortgage. 

Is there such a thing as a100% cash-out loan

A 100% cash-out refinance is only offered by the VA loan programs. VA loans are only available to active-duty members of the military and veterans. Individuals who have qualifying service history often will find that they can get a better deal with the VA cash-out refinance compared to the FHA cash-out loan. 

What amount can be taken out in a cash-out refinance? 

The amount of cash that you will be able to take will depend on the FHA loan limits on FHA cash-out refinances, your current loan, and the current value of your home. There is not a stated limit on how much cash can be taken. You can receive a new loan of a maximum of 80% of the current value of your home and you are entitled to receive any amount of cash this yields.  

Is the money that you get out of a cash-out refinance taxable? 

A cash-out income is not income, it is a debt. Therefore, it normally is not taxable as income. However, before you file, consult with a tax advisor. 

How soon can FHA cash-out refinancing be done?

There are requirements that must be met before FHA cash-out refinance may be used. You have to live in the house you are refinancing for a minimum of 12 months. You also have to pay all of the mortgage payments for a year within the month that the payments were due.  

Is a home equity loan offered by the FHA?

Usually, equity loans are referred to as home equity or a home equity line of credit. Typically, they are second mortgages put on top of existing primary mortgages. The FHA does not offer this type of loan. The closest thing is FHA cash-out refinance. If you currently have an FHA loan, you can possibly obtain a home equity loan from a local credit union or a bank. That would require a decent amount of home equity and good credit.

On an FHA cash-out loan what is the maximum DTI (debt-to-income ratio)?

A 43 percent or lower DTI is required for FHA loans unless there are significant compensating factors like a high amount of home equity or a high credit score.  In those situations, it is possible to have a DTI of up to 50 percent. DTI compares your pre-tax income with your future housing and any other debt payments. For example, if you earn $7,000 per month, then a 43% DTI is $3,000. So, you could in this example have a $2,000 monthly house payment and $1,000 combined payments on all other debts, including student loans, car loans, etc. 

Can a co-borrower be added to an FHA cash-out loan? 

No borrower can be added to the loan who doesn’t live in the house. They are referred to as non-occupant co-borrowers, and for cash-out loans, they are not allowed.

Can a second mortgage be added to a cash-out loan? 

In general, a second mortgage cannot be added to the FHA’s cash-out loan unless the two loans total 80% or less of the value.  of the home, it might be possible for an existing second mortgage to be kept and then subordinate it under a new FHA loan. The subordinating process involves obtaining a document from your second mortgage lender that states that it is okay for you to obtain a new first mortgage on your house.

What are FHA equity reserves?

Your lender might have sent you a notification that says you have FHA equity reserves that have not been tapped into. That is a marketing gimmick that is attempting to entice you into refinancing using an FHA streamline refinance. It probably is referring to your FHA mortgage insurance refund that you are eligible to receive when your current FHA loan is replaced with a new loan using FHA streamline refinance. FHA streamline refinance does not allow cash-outs, but you might have lower monthly payments. The FHA’s cash-out refinance is the only one where you get cash back at closing.

Check to see if you are eligible for the FHA’s cash-out loan 

The best FHA cash-out loan candidates are homeowners whose credit is not great but who need to tap into their home equity. For individuals with 20% or more equity and good credit, a home equity loan or conventional cash-out refinance may produce lower costs. FHA refinance rates are currently low, which results in more homeowners being eligible for the program.

If FHA cash-out refinance is something you are interested in, make sure you shop around with several lenders to find the best rate on a new loan.

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