FHA Cash Out Refinance Requirements

fha cash out refinance

Home owners have the ability to refinance their existing FHA mortgage while cashing out additional equity for home improvements, debt consolidation, investments and more. FHA guidelines permit a maximum loan-to-value ratio of 80% for cash out refinances.

What is an FHA Cash Out Refinance?

An FHA cash out refinance is a new mortgage against the property which pays off the existing loan, plus provides additional money from some of the remaining equity in the home to be used for other purposes. The maximum loan amount permitted per the FHA guidelines is 80% of the appraised value.

According to HUD’s FHA Handbook, there must be a net tangible benefit to the borrower when refinancing. This means your rate or term must improve, or you are trying to access equity.

Read more about FHA refinance options.

FHA Cash Out Refi Guidelines 2024 – Eligibility and Requirements

Qualifying for the cash out option is nearly the same as qualifying for any FHA loan. However, there are a few slight modifications which only apply to the cash out version of the FHA loan. These are the minimum requirements to qualify:

  • Employed for a minimum of 2 years
  • Minimum credit score of 500
  • No recent bankruptcies
  • Maximum debt to income ratio of 56.9%
  • Maximum total loan amount of 80% loan to value
  • Need to have made at least 6 monthly payments on existing mortgage before applying
  • Cannot have any late mortgage payments within the past 12 months
  • Property Requirement – The home must be your primary residence and 1-4 units

These are just the basic requirements. We can help you to determine exactly how much you can qualify for and provide a rate quote without running your credit.

An important note is some lenders have their own credit score and DTI requirements which may be tighter than what FHA guidelines permit.

In our more than 20 years in the industry as mortgage professionals, we have helped tens of thousands of homeowners to refinance their homes with an FHA loan. Just click to contact us to discuss your options and provide you with all of the information needed for you to make a decision about your refinance.

Real Example of a refinance scenario:

Below is an example of how the program will work. One of the variables that may differ for each person are the closing costs.

Original Purchase Price $200,000
Current Loan Balance $180,000
Current Appraised Value $255,000
New Loan Amount at 80% of the Appraised Value $204,000
Estimated Closing Costs $6,120
Estimated Cash Out Amount  $17,880

This is just one example and every scenario will be different. The closing costs will need to be calculated when you speak with one of our lenders. If you are unsure of what to budget for closing costs, read about the FHA closing costs.

Credit Score Requirement

FHA guidelines permit credit scores as low as 500, however lenders have the autonomy to impose their own credit score requirements which can be higher. As a result, most lenders will look for credit scores over 580 when applying for the FHA cash out.

If you are unsure of what your scores are or think they may be too low to qualify, we still think there is a chance for you. Reach out to us here and we can have one of our loan experts help with your credit.

What is the Max LTV When Cashing Out Equity?

The maximum LTV for an FHA cash out refinance is 80% of the appraised value of the home.

Your lender will require a full appraisal before issuing a final approval. After the appraisal, your loan amount can be adjusted to meet the maximum 80% LTV requirement.

What Can the Cash be Used For?

The FHA does not restrict what the cash out funds can be used for and there are many benefits. However, these are the typical reasons why homeowners opt for a FHA cash out refinance:

  • To make home improvements such as updating your kitchen or bathrooms
  • To consolidate credit card debt
  • To pay off auto loans
  • To pay off student loans
  • For college savings funds
  • For a down payment on another property

In the end, you can use the funds for anything you want. However, paying down high interest credit cards and other high interest accounts makes the most sense financially.

What are the Closing Costs?

Something you need to consider before moving ahead with the refinance is the closing costs. FHA closing costs will amount to anywhere from 2%-5% of the loan amount. Remember with FHA loans you will still have the mortgage insurance premium at closing and also the monthly mortgage insurance included in your payment.

The closing costs will be paid for out of the cash out funds or will essentially reduce the amount you can cash out. We suggest reading our article on FHA closing costs, FHA mortgage insurance, and the article about rolling FHA closing costs into the loan.

We can help provide you with a closing cost estimate but your best bet is to look at the closing documents from your home purchase to see exactly what those costs were. Then, plan on eliminating the inspection and a reduction of the mortgage insurance.

Once you complete a loan application, your estimated closing costs will be fully disclosed.

FHA Cash-Out Refinance Lenders

We mentioned earlier that you may find each lender could have different requirements when it comes to things like credit score, job history, and more. Therefore, there really is not a single lender that we can say is the best lender for your refinances. 

The companies listed below are the most popular lenders, but they may not be the best fit for what you need. Therefore, complete our request a quote form and we will match you with a lender that is the best fit for you.

Here are some popular FHA lenders:  Get a quote

Click to get connected with a Lender

Typical FHA Interest Rates

The interest rates for cashing out are similar to what you would see if you were obtaining a mortgage to purchase a home. You can expect rates to be slightly lower than that of a conventional cash out refinance.

If you are looking for the lowest rate possible, you can potentially buy the rate down by paying for discount points with some of your cash-out proceeds.

Loan Limits and Application Process

No matter what type of FHA loan you are applying for, there will be a maximum FHA loan limit for each county. This is the maximum FHA loan amount you are permitted to have regardless of whether you can qualify for a higher amount based upon your income. We have an FHA loan limits page that you can review to see what the maximum is for your area.

The application process is very simple and should take a short time if you apply online. The loan officer will ask you to complete the application like you would for a purchase. However, you are not required to provide income documentation. No pay stubs, W2’s or tax returns.

There will be no appraisal to verify the property value and this may be helpful at a time when property values have declined. 

The loan officer will verify that you have not been late on any mortgage payments over the past 12 months. Your credit score will not be used as a deciding factor of whether your loan is approved, but it does play a major role in determining your interest rate.

Once you receive a conditional approval from the automated underwriting system, then the title work can begin and any outstanding items requested by the underwriter should be provided.

The closing should take no loner than three to four weeks from start to finish

FHA Seasoning Requirements When Cashing Out Equity

The FHA seasoning requirement is 12 months from the closing date of your current loan or purchase. This means you must wait at least 12 months after the purchase or refinance date before you can cash-out equity.

In addition to waiting 12 months, you cannot have any late or missed mortgage payments during that time.

Refinancing with a 580 Credit Score

Many homeowners have credit scores of 580 and are looking to cash out equity with an FHA loan. Although most lenders require higher scores for a mortgage approval, there are a handful of lenders who will accept a 580 score when cashing out.

If your scores are below 580 you still may qualify for the program. We have lender partners who are willing to accept very low credit scores.

FHA Cash-Out Plan

The FHA cash out plan involves refinancing your current mortgage while cashing out equity. With this plan, you will refinance up to a maximum of 80% of the appraised value. You will have to qualify by providing all of your income documentation and tax returns.

The equity that you cash out can be used for anything you want. The FCOP differs from the FHA streamline refinance because it allows for a larger loan amount than the current balance and you need an appraisal.

Is the FHA Cash-Out Plan Legit?

The FHA cash out plan is absolutely a legitimate program offered by most FHA lenders. If you can qualify for the program than it is a legitimate option for you. The important thing is to be smart with the equity that you cash out and use it for investments or to pay down high interest debt.

FHA Refinance with Very Bad Credit

If your credit score is extremely poor, you still may have an opportunity to get a cash out refinance. With a score as low as 500, you can potentially qualify but with compensating factors

Your credit score is not the only thing the lender will look at. High income and longevity in your current job will help you to secure an approval.

When your credit scores are low, it may limit how far you can push the debt to income ratio for your loan. Some lenders reduce the DTI as the credit scores decline.

Is Refinancing to pull out equity a Smart Decision?

Every situation and reason for applying to access equity in the home will be different. The only thing that is the same for everyone is the need for additional cash for a legitimate purpose.

Most financial experts would prefer that you use the money for things that can build wealth or to pay off high interest debt.

What these experts like Dave Ramsey will caution against is using the money for frivolous things such as vacations and new cars. You should consult with a financial professional to see whether a cash out equity makes sense for you.

Is there an FHA Streamline Cash Out?

The FHA does not offer a cash out streamline option. Therefore, you would need to provide all of the standard documentation to qualify for an FHA cash-out refinance. If you would like a streamline refinance, you would not have the ability to cash out any additional funds other than what is needed to cover the closing costs. Read more about the [No cash out FHA streamline refinance]

Can I take out equity with FHA if my Current Loan is Not an FHA Loan?

You can still refinance even if your current loan is not an FHA loan. The only restriction where the current loan must be an FHA loan is when you are applying for an FHA streamline refinance.

How Long do You Have to Live in the Home to Access the Equity?

According to the FHA guidelines, homeowners must live in the home for at least 6 months and make at least 6 mortgage payments before refinancing. However, to cash out equity you will need to be in the home for at least 12 months.

FHA Home Equity Loan Options

The FHA does not have a home equity loan option available to homeowners today.  You will have just two options:

  1. FHA cash out refinance
  2. Home Equity Loan not backed by the FHA

When you get a home equity product, you will likely have an interest rate that adjusts monthly. This adds some long term risk if you plan to take a few years to pay back the loan. The other watch out is your total loan to value ratio (original FHA loan + the home equity loan)

Summary of the Program Benefits and Whether a Cashout FHA Refinance is Right for You.

In the end, refinancing to pull out cash may or may not be right for you. The key factor will be the amount of equity you have in your home and what the change in the interest rate will be after the refinance. If you are going to see a significant increase in rate just to cash out a small amount, then you may want to consider finding another way to get the additional funds you are looking for.

Your first step should be to speak with an FHA lender to have a discussion without pulling your credit to determine whether this makes sense for you. Click to speak with an FHA lender who can help.

Frequently Asked Questions

What is the difference between a cash out refinance and a HELOC?
The cash out refinance is a fixed rate loan where you cash out the equity all at once. Conversely, a HELOC is a line of credit that you can borrow against as needed and the rate adjusts monthly. FHA does not offer a HELOC.

How does the refinance with cash out option work?
You must first complete a full application with the lender. They will evaluate the application the same way as a purchase loan. You will need to have an appraisal and the traditional FHA closing costs will apply.

How do I qualify for the FHA refinance program with cash out?
To qualify for the program, you must have the income, equity and minimum credit scores per the FHA guidelines. You may also find that some lenders may impose tighter requirements than what the FHA guidelines permit.

How much equity can I cash out with an FHA refinance?
You can cash out up to 80% of the home’s appraised value but you cannot exceed the maximum FHA loan limit for your area and you must also qualify for the loan based upon your income.
How long does it take to complete the refinance?
If you complete the application quickly and provide the loan officer with all of the documentation needed, you can complete the refinance in just a few weeks.
How is the interest rate determined for the refinance?
Interest rates for any refinance including the cash out are determined by your loan to value ratio and your credit scores. Those are the two major factors when any lender provides you with a rate quote.
How does an FHA version of the cash out refinance differ from a conventional cash out refinance?
The two programs have different loan maximum loan to value ratios. With conventional, you can go higher than 80% loan to value. However, with FHA the debt to income ratio is higher capping at 56.9%.
How much can I borrow with an FHA cash out refinance?
The most you can borrow is the lesser of 80% of the appraised value of the home or the maximum FHA loan limit in your county.
How do closing costs affect how much you can cash out?
Closing costs do not affect your loan amount, but if you plan on rolling closing costs into the loan, then you will walk away with less cash after closing.
How does the appraisal process work for the FHA refinance with cash out?
Once you are conditionally approved for the loan, your loan officer will order the appraisal to establish the current value of your home. That value will be a factor in determining the maximum amount of equity you can cash out. You will be required to pay for the appraisal up front but you can reimburse yourself with the cashed out equity after closing.
How can I find a lender that offers FHA cash out refinancing?
We have a network of lenders who offer all of the FHA refinance options. Simply complete this quote form and an experienced loan officer will contact you for a quote and to discuss your options.
Who offers FHA cash out refinancing options?
Most lenders who offer FHA loans also offer the cash out option. However, not every lender will have the same guidelines. Some do not accept low credit scores while others may also reduce the DTI requirements.
Who should consider using an FHA loan to cash out equity?
Anyone who needs cash to remodel the home or consolidate debt should consider this program. We recommend consulting with a finance professional if your goal is to use the cash for other purposes such as investments.
Who determines the maximum loan amount for the refinance?
The maximum loan amount is determined by your loan officer and also by the established FHA loan limit in your area.
Who can help with the application process?
A good loan officer can help you with the application if you are unsure how to fully complete it.
Who has the best interest rates when refinancing?
Many lenders offer FHA loans and most will have competitive rates. Mortgage brokers have access to many lenders including wholesale lenders who do not work direct to consumer. We have a network of lenders who offer extremely competitive rates for FHA loans.
Who sets the guidelines for an FHA refinance loans?
HUD sets the FHA guidelines and they remain constant from year to year with the exception of the FHA loan limits which change annually.
Who can explain the pros and cons of a refinance with cash out?
Your loan officer should be experienced enough to fully explain the pros and cons of cashing out equity with an FHA loan.
What are the current interest rates for this type of refinance?
Interest rates when cashing out are similar to what you would get offered if you were purchasing the home or simply refinancing for a lower rate. Right now, the rates for FHA are lower than conventional interest rates.
What documents are needed for an FHA refinance application?
The lender will ask for the standard required documents per the FHA guidelines. Be prepared to gather your pay stubs for the past 30 days, last two months bank statements, and your last two years tax returns and W2s.
What is the difference between an the cash out refinance and a regular refinance for FHA?
The difference between the two is you are capped at 80% of the appraised value of the home when you are cashing out. With a regular refinance you can borrow up to 96.5% of the appraised value. With an FHA streamline refinance you could borrow more than the home value since there is no appraisal.
What credit score is needed?
FHA guidelines permit credit scores as low as 500. However, most lenders require higher credit scores when cashing out.
What are the repayment terms for an FHA refinance?
The repayment terms available for FHA loans are fixed rate terms of 30 or 15 years, and also adjustable rate options of 5 years and 7 years.

Noteworthy FHA Cash-Out Statistics You Should Know

  1. Approximately 26% of homeowners who have an FHA loan consider a cash out refinance as a way to access their home equity.
  2. The average amount of cash obtained through an FHA equity cash out refinance is $34,570.
  3. Around 42% of borrowers who opt to cash out use the funds to pay off high-interest credit card debt.
  4. On average, borrowers who choose to cash out equity with FHA increase their loan amount by 12%.
  5. About 18% of homeowners who take advantage of this refinance use the funds for home renovation or improvement projects.
  6. The typical length of time it takes for an FHA refinance to close is 48 days.
  7. Over 92% of borrowers who go through the process of an FHA loan are satisfied with their decision.
  8. On average, homeowners who pursue a refinance to access equity have owned their property for approximately 6 years before considering this option.
  9. The majority (67%) of borrowers who utilize an FHA loan to refinance have a credit score above 700.

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