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FHA cash-out refinance: Requirements and guidelines

Yahoo Personal Finance· Getty Images
Updated 5 min read

When you build equity in your home, the house can become a source of cash as well as a place to live. With an FHA cash-out refinance, you can tap into your home equity to pay off higher-interest debt, make home improvements, return to school, or accomplish other financial goals.

There are pros and cons to consider with FHA cash-out refinancing, though. You will want to look at your new interest rate, how much you want to borrow, and the time it will take to pay off your home after a cash-out refinance.

In this article:

Learn more: Want to refinance your FHA loan? Here are 4 options.

An FHA cash-out refinance is for homeowners who already have a mortgage backed by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development (HUD). The FHA insures mortgages, but it doesn’t issue the loans — you’ll go through a private mortgage lender to get an FHA loan.

With an FHA cash-out refinance, you take out a new mortgage loan to pay off your existing mortgage and tap into your home equity to receive cash. To be eligible for FHA cash-out refinancing, you must have at least 20% equity in your home. The money you get in the process is called a withdrawal because you’re withdrawing from the value of your home.

Read more: How a rate-and-term refinance works

You apply for an FHA cash-out refinance similarly to how you applied for your initial FHA loan. As with your original mortgage, you will pay closing costs such as an appraisal fee, credit report fee, and FHA mortgage insurance premiums (MIPs). You’ll also choose a loan term of up to 30 years.

Learn more: How to get rid of FHA mortgage insurance

The new loan will pay off your current mortgage and liens. You will be able to withdraw cash from the difference between your new loan amount and your home’s value.

For example, let’s say your home is valued at $400,000, and you still owe $250,000 on your current loan. This means you have 37.5% equity in your home, which is more than enough to qualify for a cash-out refinance. You get an FHA cash-out refinance and decide to borrow $320,000 for the new loan, which is $70,000 more than you owed on your initial loan. You can withdraw $70,000 from your home minus closing costs.

Read more: How the FHA Streamline Refinance program works

To qualify for a cash-out refinance, you must meet and follow several FHA guidelines.

  • Minimum 580 credit score. The FHA allows a score as low as 580 for an FHA cash-out refinance, but minimums vary depending on the lender you choose. Many require a minimum 600 credit score. Higher credit scores may qualify for lower refinance rates. Compare the best FHA lenders for both rates and qualifications.

  • Your debt-to-income ratio of 43% or less. Your debt-to-income ratio (DTI) should be at or below 43% of your gross monthly income — and your DTI includes your monthly mortgage payments. DTIs are based on monthly payments toward debt, such as credit cards and loans, compared to how much you earn. For example, your gross (pre-tax) income is $6,000 monthly, so $2,580 is 43% of your income. Your credit card minimum payments add up to $200. You also have a student loan payment of $200 and a car payment of $400. Therefore, your monthly costs toward PITI (principal, interest, taxes, and insurance) can be up to $1,780 for most mortgage lenders to approve your mortgage refinance.

  • Your loan-to-value (LTV) ratio must be 80% or less of the appraised value of your home. Another way to think of this is that you need to have at least 20% equity in your home to qualify for an FHA cash-out refinance.

  • The national maximum FHA loan limit for one-unit homes in most areas of the country is $498,257. However, there are specific areas of the country with a limit of $1,149,825 for FHA loans. These areas in California, Colorado, Idaho, Massachusetts, New York, New Jersey, Pennsylvania, Utah, Wyoming, Virginia, West Virginia, and Washington, D.C. There are areas with maximum loan limits between the floor and ceiling. You can find the loan limit for your area using the FHA Mortgage Limits tool.

  • In most cases, at least one borrower must have the home as their primary residence. There are exceptions if the home is inherited.

  • Minimum 12 on-time payments. You must have owned the home for at least 12 months and made 12 on-time payments to be approved for an FHA cash-out refinance.

Dig deeper: How soon can you refinance a mortgage after buying a home?

  • If market interest rates have dropped, you could get a lower mortgage rate by refinancing.

  • You will still have just one mortgage payment by taking out a larger loan. This is in contrast to accessing cash with a second mortgage such as a HELOC or home equity loan, which would result in two separate mortgage payments each month.

Learn more: Cash-out refinance vs. home equity loan

  • By tapping into your home equity, you are likely increasing the time until your home is completely paid off.

  • A cash-out refi may not be the most practical or affordable way to reach your financial goals, especially if refinance rates have gone up since your initial mortgage.

  • Your monthly payment could rise based on interest rates.

  • You may get in the habit of refinancing rather than using cheaper borrowing methods or trying a new budgeting strategy.

Read more: FHA loan pros and cons

The FHA has several guidelines for a cash-out refinance. You must have at least 20% equity in your home, use the home as your primary residence, and have made 12 on-time payments to qualify for an FHA cash-out refinance.

Yes, FHA cash-out refi loans are legitimate ways to take out money from your home.

Approval standards are generally the same regarding debt-to-income and credit score as when you borrowed your original mortgage.

This article was edited by Laura Grace Tarpley