FHA cash-out refinance loans make it possible to borrow against your home’s value if your credit score prevents you from qualifying for a conventional cash-out refinance, home equity loan, or home equity line of credit (HELOC).
If you want to access your home equity, an FHA cash-out refinance could be a good choice — though it does come with costs that other loans don’t.
What are the requirements for an FHA cash-out refinance?
While the FHA itself does not issue home loans, it does have over 1,500 pages of rules about them. Lenders must follow FHA cash-out refinance guidelines to get the Federal Housing Administration’s loan guarantee, which limits lenders’ losses if the homebuyer can’t pay back their loan. That means you’ll need to meet these requirements:
- Maximum loan-to-value (LTV) ratio: 80%
- Maximum loan amount: $472,030 for a single-family home in most parts of the country but $1,089,300 in high-cost areas.
- Minimum credit score: 500
- Maximum front-end/back-end debt-to-income ratio (DTI): 31%/43%. Can be as high as 40%/50% with compensating factors such as verifiable cash reserves.
- Payment history: You must have made all your mortgage payments within the month they were due for the last 12 months or from the point you received the loan (whichever is a shorter time frame).
- Borrower occupancy: Anyone whose income will be used to qualify for the loan must live in the home as their main residence.
- Primary residence: At least one borrower needs to have lived in the home as their main residence for the last 12 months. You can’t do an FHA cash-out refinance on an investment property or vacation home.
- Seasoning: This is a lender term for how long you’ve had your existing mortgage. You need to have made at least six payments on your existing mortgage, if you have one.
- No delinquent federal tax debt: If you owe the IRS money, you’ll need to show proof of on-time payments for at least three months.
Lenders can set their own requirements that are higher than the FHA’s. This means you might still have a hard time getting a loan if your credit score is 520 or your back-end DTI is 40%.
What does an FHA cash-out refinance cost?
To get an FHA cash-out refinance, you’ll have to pay most of the standard mortgage closing costs that you’d pay with any type of refinance:
- Appraisal fee
- Credit report fee
- Flood determination fee
- Lender’s title insurance
- Loan application fee
- Loan origination fee
- Loan underwriting fee
- Pest inspection fee
- Prepaid homeowners insurance
- Prepaid mortgage interest
- Prepaid property taxes
- Property survey fee
- Recording fee
- Settlement agent fee
- Tax monitoring fee
- Tax status research fee
- Title search fee
Your closing costs on a cash-out refinance should be a bit lower compared to when you bought your home. Here’s why:
- You won’t need to get a home inspection.
- You won’t need to purchase owner’s title insurance if you already have it (if not, it’s optional, but you may want to buy it).
- You won’t owe a transfer tax because the property isn’t being sold.
- You may not need to fund an escrow account for your lender to pay property taxes and insurance. You may have an existing escrow account balance that you can transfer to your new lender, or you may not need an escrow account since you’ll be retaining at least 20% of your equity.
You’ll also have to pay a one-time, upfront mortgage insurance premium and annual mortgage insurance premiums with an FHA cash-out refinance.
- The upfront premium is 1.75% of the loan amount.
- The annual premiums are 0.45% to 1.05% of the loan amount (but you pay them monthly).
Your annual premium rate depends on the amount you borrow, your mortgage term, and your loan-to-value ratio. Borrowers with shorter mortgage terms, smaller loans, and lower LTVs pay lower premiums.
All told, closing costs on a mortgage typically total 2% to 5% of the amount borrowed. You can lower your costs by shopping around for your lender and third-party closing services for the title search and loan settlement.
Here’s an example of what you might pay for a FHA cash-out refinance and how much you’d get from the loan if you paid your refinance costs from your loan proceeds:
Home value: $500,000
New loan amount: $400,000
Existing mortgage payoff: $250,000
Closing costs: $8,000
Upfront mortgage insurance premium: $7,000
Total cash: $135,000
How does an FHA cash-out refinance work?
An FHA cash-out refinance allows you to take out a new FHA loan that will pay off your existing mortgage, if you have one, and give you cash back that you can use for any purpose. Part of that sum will go toward the closing costs on your new loan. After closing, you’ll have a pile of cash, but you’ll also have less equity and a new monthly payment. The entire process usually takes several weeks.
Here are some reasons you might consider a cash-out refinance:
- To make major home repairs or renovations
- To expand your home instead of moving
- To pay off high-interest debt
- To buy an investment property or second home
- To cover education expenses
- To start a business
FHA cash-out refinance rates
FHA loans have competitive interest rates. The mortgage insurance premiums borrowers pay help fund the program that protects lenders from losing too much money when a borrower defaults.
The requirement that you keep at least 20% of your equity when you get an FHA cash-out refinance also helps keep cash-out refinance rates relatively low. A conventional lender may charge you higher closing costs or a higher interest rate on a cash-out refinance, especially if your credit score is below 660 and you’re borrowing more than 75% of your equity.
However, once you add an FHA lender’s interest rate to the FHA’s annual mortgage insurance premium rate, it might seem less attractive — especially after you factor in the FHA’s upfront mortgage insurance premium.
It’s a good idea to compare quotes for both conventional and FHA cash-out refinancing to see how rates and fees differ. The differences between these two loan types can be substantial depending on your credit score and loan-to-value ratio. And, of course, you’ll also want to get quotes for each loan type from multiple lenders.
FHA cash-out refinance vs. conventional cash-out refinance
Learn More: FHA vs. Conventional Loan: Which One Should You Choose?
FHA cash-out refinance vs. FHA streamline refinance
An FHA streamline refinance does not allow you to cash out your equity. It pays off your existing mortgage (along with any late fees and escrow shortages) and replaces it with a new mortgage.
The purpose of a streamline refinance is to give you more financial stability by getting you out of a mortgage you’ve defaulted on, getting you out of an adjustable-rate mortgage and into a fixed-rate mortgage, shortening your loan term, or reducing your combined rate: your interest rate plus your annual mortgage insurance premium rate.
See: What Is An FHA Streamline Refinance?
Pros and cons of an FHA cash-out refinance
Weighing the benefits and drawbacks of an FHA cash-out refinance can help you decide whether this type of loan could be right for you. Keep in mind, however, that most of these pros and cons are not unique to an FHA cash-out refinance: They apply to any type of cash-out refinance.
Pros
- More relaxed borrower qualifications: You may be able to get an FHA cash-out refinance with a lower credit score than you’d need for a conventional cash-out refinance.
- Lump-sum payment: You’ll get the full amount of equity you’re cashing out, minus closing costs, once you’ve signed all the paperwork and the lender funds your loan.
- Use the money however you want: FHA cash-out refinance guidelines don’t require you to use the money for a specific purpose.
- Non-FHA loans can qualify: If you own your home mortgage-free or if your existing mortgage is a conventional, VA, USDA, or other type, you may qualify for an FHA refinance. You don’t have to be an existing FHA borrower. That said, if you have an existing FHA loan and it’s less than 36 months old, you’ll get a prorated discount on your upfront mortgage insurance premium.
See: Complete Checklist of Mortgage Refinancing Requirements
Cons
- FHA mortgage insurance: Both the upfront premium and annual premiums are substantial. And FHA mortgage insurance removal is unlikely: You’re stuck with the annual premiums for as long as you have the loan if you get a 30-year mortgage. With a 15-year term, you can stop paying premiums after 11 years.
- Maximum 80% loan-to-value ratio: On a non-FHA cash-out refinance, you may be able to get an LTV as high as 90%.
- Potentially higher interest rates: Lenders classify borrowers who take equity out of their homes as a higher credit risk. For example, conventional lenders typically charge at least 0.375% of the loan amount for a cash-out refinance compared to a purchase mortgage or limited cash-out refinance. But instead of increasing a borrower’s closing costs by that amount, they might charge a higher interest rate instead. FHA lenders may do the same.
- Closing costs: Closing costs are a drawback of any type of refinance, but it can sting to have that money immediately taken out of your cash-back sum.
- No interest rate discounts: You can’t pay points (prepaid interest) to lower your interest rate with an FHA cash-out refinance.
Check out: The Cost to Refinance a Mortgage (and How to Pay Less)
Alternatives to an FHA cash-out refinance
If an FHA cash-out refinance doesn’t sound ideal, one of these options might work better for your situation:
- Conventional cash-out refinance: If your credit score is high enough and you keep at least 20% of your equity, you may be able to get a new mortgage and cash without paying mortgage insurance premiums.
- Co-investment, shared appreciation, or equity sharing agreement: If you don’t want to take on new debt and you’re comfortable giving an investor a stake in your home in exchange for a lump sum, one of these agreements could be the right choice.
- Personal loan: If you want to borrow a lump sum and you can pay it back over one to seven years, a personal loan could provide the cash you need without paying the expensive closing costs associated with a cash-out refinance. Plus, you won’t have to use your home as collateral.
- Home equity loan: If you want to borrow a lump sum at a fixed rate but don’t want to replace your existing mortgage, a home equity loan could be the ticket.
- Home equity line of credit: If you want to borrow smaller sums as needed, you don’t mind having an adjustable rate, you want the lowest possible payments for a few years, and you don’t want to replace your existing mortgage, a HELOC could be the right choice.
Learn more: Home Equity Loan vs. Home Equity Line of Credit (HELOC)
FHA cash-out refinance FAQs
Is a cash-out refinance the same as a home equity loan?
No. A cash-out refinance loan pays off your current mortgage balance, while a home equity loan is a second mortgage.
Can I get a cash-out refinance loan right away?
The amount of time will depend on the type of loan you have, but you will typically have to wait six to 12 months from closing.
