FHA Cash-Out Refinance Requirements and Guidelines

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An FHA cash-out refinance can be an easy and affordable way to access your home equity for a variety of productive purposes. For example, you can use the cash from a cash-out refinance to consolidate high-interest debt, complete home improvement projects, or purchase an investment property.

FHA cash-out refinances also have less stringent credit and income requirements than other consumer loan options, while still offering competitive rates.

Here’s a closer look at FHA cash-out refinances:

What is an FHA cash-out refinance and how does it work?

An FHA cash-out refinance allows you to refinance your existing FHA loan and take out a lump sum of cash in the process.

Similar to a traditional cash-out refinance, you’ll get a new interest rate and repayment terms, and you can borrow up to 80% of the home’s value minus your remaining loan balance. The key difference is that your new loan will be insured by the Federal Housing Administration rather than a lender.

You can use your lump-sum payment any way you like, but here are some common reasons people tap their equity:

  • Home renovations
  • Emergency bills
  • Credit card debt
  • Personal loans
  • Education costs
  • Second home purchase

In addition to the flexibility, FHA loans often have lower interest rates than personal loans and credit card interest rates, making them a more attractive option to homeowners.

What about taxes? Due to the 2017 federal tax reforms, your cash-out refinance mortgage payments are less likely to be tax-deductible. However, your payments may qualify for the mortgage interest deduction if you use the funds to make qualifying capital improvements and file an itemized tax return.

While it’s harder to deduct mortgage interest payments, your home equity lump sum isn’t considered taxable income — it’s seen as a loan. As a result, this cash-out refinancing can have better tax treatment than making distributions from a tax-advantaged retirement account.

FHA cash-out refinance vs. FHA streamline refinance

An FHA cash-out refinance is different from the better-known FHA streamline refinance loan program. Streamline refinances, for one, don’t require a home appraisal or credit check.

To qualify for an FHA streamline refinance, you can only refinance a current FHA loan. The FHA cash-out program, on the other hand, is open to conventional mortgages and government-backed home loans, such as VA loans and USDA loans.

With Credible, you can see personalized mortgage refinance rates from all of our partner lenders in a matter of minutes. Checking rates is free and won’t impact your credit score.

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How do you qualify for an FHA cash-out refinance?

To qualify for an FHA cash-out refinance, you must satisfy the minimum credit score, debt-to-income ratio (DTI), and home equity guidelines set by the lender.

Here are some of the basic FHA cash-out refinance requirements you’ll need to meet:

  • Min. credit score: 500
  • Max DTI: Between 43% and 50%
  • Max loan-to-value ratio (LTV): 80%
  • Min. amount of home equity: 20%
  • Min. occupancy period: At least one borrower must have lived in the home for at least 12 months before applying
  • Payment history requirements: Must have made on-time monthly payments for at least 12 months before applying
  • Qualifying mortgage types: Conventional, FHA, VA, and USDA

A lender may have different requirements than the FHA refinance guidelines listed above. For example, you may need a credit score of at least 580 to qualify with some lenders, and mortgage companies often want your DTI to be no higher than 43%.

Be sure to compare other home refinance options to find the best loan terms. You might be able to secure a better deal by refinancing your FHA loan into a conventional loan.

  FHA cash-out-refinance Conventional cash-out-refinance
Min. credit score 500+ 620
Min. home equity 20% 20%
Appraisal requirement Yes Yes
Paperwork Proof of income, utility bills to verify at least 12 months of residency, and the last 12 mortgage payments Proof of income, credit report, and tax returns
Mortgage insurance For the life of the loan None if you have at least 20% equity
Other
  • Must live in the property for at least 12 months
  • No late payments in the last 12 months
  • Non-FHA loans are eligible
  • Can refinance six months after the original mortgage closing
  • Can convert FHA loans

Learn More: FHA vs. Conventional Loans: Which One’s Right for You?

What does an FHA cash-out refinance cost?

Like a traditional mortgage, you’ll pay closing costs to refinance your current FHA home loan. These fees are approximately 2% to 5% of the loan amount. Some of the closing fees can include:

  • Appraisal fees
  • Upfront mortgage insurance premium (UFMIP)
  • Credit report
  • Origination fee
  • Lender fees

All FHA loans have an upfront mortgage insurance premium of 1.75% of the loan amount. It’s possible to get a refund credit to offset this charge when you refinance an FHA-insured mortgage within the first three years. The refund is bigger if you refinance sooner.

You’ll also pay an annual mortgage insurance premium for the life of the loan. The only way to remove FHA mortgage insurance is by refinancing to a conventional loan.

Pros and cons of an FHA cash-out refinance

Here’s a closer look at the advantages and disadvantages of using the FHA cash-out refinance program.

Pros

Cons

  • FHA mortgage insurance premium: FHA loans charge an upfront mortgage insurance premium when you sign the closing documents. And unlike other cash-out refinance options, you’ll also have to pay a monthly mortgage insurance premium for the life of the loan (unless you refinance into a conventional loan).
  • Maximum 80% loan-to-value ratio: You’ll only be able to refinance your remaining principal and equity up to 80% of the home appraisal value. The first 20% of your home equity is inaccessible and helps secure the loan.
  • Potentially higher interest rates: Cash-out refinance loan rates are usually higher than a no cash-out refinance. You’ll need to decide if tapping your home equity is worth the potentially higher rate and monthly payment.
  • Closing costs and credit check: The FHA cash-out refinance application process requires a hard credit check, closing costs, and an appraisal fee. These costs may offset the potential benefits of withdrawing home equity and getting new repayment terms.

Keep Reading: HELOC vs. Home Equity Loan: How to Decide

About the author

Josh Patoka

Josh Patoka

Josh Patoka is a personal finance authority and a contributor to Credible. His work has been published on Fox Business and several award-winning personal finance blogs including Well Kept Wallet, Wallet Hacks, and Frugal Rules.

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https://www.credible.com/blog/mortgages/fha-cash-out-refinance/

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