FHA Cash Out Refinance
An FHA cash out refinance allows home owners to refinance their existing 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 home which pays off the existing mortgage, plus provides additional money from the remaining equity in the home to be used for other purposes.
FHA Cash Out Refinance Guidelines 2023 – How to Qualify
Qualifying for an FHA cash out refinance is nearly the same as qualifying for any FHA loan. However, there are a few slight modifications which only apply to cash out refinances. These are the minimum requirements to qualify for an FHA cash out refinance:
- Employed for a minimum of 2 years
- Minimum credit score of 500
- No recent bankruptcies
- Maximum debt to income ratio of 56%
- 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
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.
FHA Cash Out Refinance Example
Below is an example of how an FHA cash out refinance 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.
Credit Score For an FHA Cash Out Refinance
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 an FHA cash out refinance.
What is the FHA Cash Out Max LTV?
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 FHA Cash Out Refinance Funds be Used For?
The FHA does not restrict what the cash out funds can be used for. However, these are the typical reasons why homeowners opt for a FHA cash out refinance:
- To make home improvements
- To consolidate credit card debt
- To pay off auto loans
- To pay off student loans
- For college savings funds
In the end, you can use the funds for anything you want.
FHA Cash Out Refinance Closing Costs
Something you need to consider before moving ahead with a cash out refinance is the closing costs. FHA closing costs will amount to anywhere from 2%-5% of the loan amount. However, you will not need an inspection which will save you some money and you get a pro-rated discount on the mortgage insurance when you refinance.
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.
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 FHA cash out refinances.
The lenders listed below are the most popular lenders, but they may not be the best fit for what you need. Therefore, complete our request an FHA cash out refinance 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
FHA Cash Out Refinance Rates
The interest rates for FHA cash out refinances are similar to what you would see if you were obtaining a mortgage to purchase a home. You can expect rates for an FHA cash out refinance to be slightly lower than that of a conventional cash out refinance.
FHA Cash Out Refinance Seasoning
The seasoning requirement for an FHA cash out refinance is 12 months. This means you must wait at least 12 months after the purchase date before you can apply for an FHA cash out refinance.
FHA Cash Out Refinance with a 580 Credit Score
Many homeowners have credit scores of 580 and are looking to cash out equity with an FHA cash out refinance. 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.
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.
FHA Cash Out Refinance with Bad Credit
If your credit score are 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 scores are not the only thing the lender will look at. High income and longevity in your current job will help you to secure an approval.
Is an FHA Cash Out Refinance a Smart Decision?
Every situation and reason for applying for an FHA cash out refinance will be different. The only thing that is the same for everyone is the need for additional cash for a 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 refinance makes sense for you.
Is there an FHA Streamline Cash Out?
The FHA cash out refinance is not available in a 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 get an FHA Cash Out Refinance 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 Get an FHA Cash Out Refinance?
FHA cash out refinance guidelines require homeowners to live in the home for at least 6 months and make at least 6 mortgage payments before refinancing.
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:
- FHA cash out refinance
- 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)
The Bottom Line – FHA Cash Out Refinance
In the end, an FHA cash out refinance 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.