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FHA cash-out refinance: Requirements and rates for 2020

Tim Lucas
The Mortgage Reports editor

What is the FHA cash-out refinance?

An FHA cash-out refinance is a government-backed loan that allows homeowners to tap their home equity.

The FHA cash-out lets homeowners refinance up to 80% of their home’s value and get cash back at closing.

FHA cash-out requirements are lenient. Homeowners may be able to refinance with credit in the low-600 range. And, you can refinance any type of mortgage using the FHA cash-out. An existing FHA loan is not required.

FHA refinance rates are near record lows right now, so it’s a good time to take cash-out and lock in a low at the same time.   

Verify your FHA cash-out eligibility (Sep 18th, 2020)

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FHA cash-out refinance requirements

Basic requirements for an FHA cash-out refinance are as follows:

  • Credit score of at least 600 (in most cases)
  • More than 20% equity in the home
  • The home being refinanced must be your primary residence
  • You must have lived in the home at least 12 months prior to applying for an FHA cash-out
  • All mortgage payments must have been paid within the month due for the past 12 months
  • You must be able to provide employment documentation or utility bills to prove you’ve occupied the home as your primary residence for the past 12 months

Unlike an FHA streamline refinance, the cash-out refi does not require your current mortgage to be an FHA loan.

You can apply for the FHA cash-out refinance even if your existing mortgage is conventional or another loan type.

Regardless of the type of loan you have now, using the FHA cash-out refinance will result in mortgage insurance on your new FHA loan.

However, FHA refinance rates are often lower than conventional. So for many homeowners, mortgage insurance is a fair tradeoff for cash-back and a new, lower rate.

Verify your FHA cash-out eligibility (Sep 18th, 2020)

FHA cash-out refinance LTV

The maximum loan-to-value (LTV) for an FHA cash out loan is 80%.

This means that, after the cash-out has been subtracted, you must still have 20% equity leftover in your home. So you’ll need have substantial home equity for a cash-out refinance to be worth it.

Generally, the FHA cash-out refinance is best for homeowners who are sitting on lots of equity but don’t have a high enough credit score to use a conventional cash-out refi.

How much cash can you take out with FHA?

The max amount of cash you can get using an FHA cash-out refinance is dictated by your equity.

Remember, you must leave 20% equity in your home after the cash-back is withdrawn. So, when thinking about the amount of cash you can take out, look at your total equity and subtract 20% — plus closing costs — to get an estimate.

Here’s an example of how the FHA cash-out calculation works:

Current Home Value  $220,000
Current Loan Balance $140,000
New FHA Loan (max 80% of value)  $176,000
Payoff Current Loan  -$140,000
Subtract Closing Costs  -$3,000
Max FHA Cash-Out  $33,000 

In this example, the home is worth $220,000, and the homeowner only owes $140,000 on their mortgage. So they have $80K worth of equity.

However, 20% of the home’s value must remain untouched.

  • 20% of $220,000 is $44,000 —
  • So $44K must be subtracted from their total $80K equity,
  • This gives a max cash-out potential of $36,000

However, the homeowner also uses some of their cash-out value to pay closing costs ($3,000).

So they end up with a total of $33,000 cash back at closing — quite a bit lower than the $80K of equity originally calculated.

Verify your FHA cash-out eligibility (Sep 18th, 2020)

FHA cash-out refinance calculator

Curious about how much you can borrow with an FHA cash-out refinance? You can calculate your own cash back value by downloading and filling out one of the free calculator templates below.

MS Excel
Google Sheets

FHA cash-out refinance rates

FHA rates are low — even lower than conventional loan rates, in fact.

According to loan software company Ellie Mae, FHA rates average about 10 to 15 basis points (.10 – .15%) below conventional rates on average.

This is due to FHA’s strong government backing. Lenders can issue these loans at lower risk.

However, consider FHA mortgage insurance, which raises the “effective” FHA rates as follows:

   FHA Cash-Out   Conventional Cash-Out 
 Interest Rate   3.0%*  3.25%*
 Mortgage insurance   0.80%  0%
 Effective rate  3.80%  3.25%

*Sample rates only. May not be currently available

FHA cash out loans may come with higher rates than standard FHA loans. Check around with various lenders to find the best rate.

Conventional cash-out vs FHA cash-out: LTV and credit score

The big advantage of using an FHA cash-out refinance over a conventional cash-out loan is that FHA has more lenient credit requirements.

   FHA Cash-Out Conventional Cash-Out
Minimum Credit Score  500 (official), 600-660 (likely) 620 (official), 640-680 (likely)
Maximum LTV 80% 80%
Can Replace Any Loan Type Yes Yes
Occupancy Owner-occupied only Owner, 2nd home, rental 

Technically, you can get an FHA cash-out loan with credit as low as 500. However, you’re much more likely to find lenders starting in the 580-600 range, and even some as high as 600.

So if your credit is on the lower end of that spectrum, you’ll want to be extra thorough when shopping around for a lender that will approve your refinance and give you a fair rate.

FHA cash-out refinance drawbacks

The primary disadvantage to an FHA cash-out loan is the associated mortgage insurance.

FHA loans require an upfront and monthly mortgage insurance premium (MIP). These fees are as follows:

  • Upfront mortgage insurance: 1.75% of the new loan amount upfront (wrapped into the loan amount)
  • Annual mortgage insurance: 0.85% of the loan amount yearly, paid in 12 installments with the mortgage payment

This is equal to $1,750 upfront and $67 monthly for each $100,000 borrowed.

In return for the extra fees, FHA provides more credit score flexibility and a higher maximum loan-to-value (LTV) than do conventional loans.

Conventional cash-out refinances do not come with upfront or monthly mortgage insurance.

Also, conventional cash out can be used for second homes and investment properties. FHA must be used on the home you live in.

Verify your FHA cash-out eligibility (Sep 18th, 2020)

What are “FHA equity reserves”?

You may have received a notification from a lender stating that you haven’t tapped into your FHA equity reserves. This is a marketing gimmick that is trying to entice you to refinance via an FHA streamline refinance.

This is likely referring to the FHA mortgage insurance refund you are entitled to when replacing one FHA loan with another via an FHA streamline refinance.

Cash-out is not allowed when you get an FHA streamline refinance, however, you may save on your monthly payment. You can learn more about the FHA streamline program here

Best uses for the FHA cash-out refinance

With an FHA cash out, you can pay off any loan type, plus take equity out of your home in the form of a check, or have it wired to an account of your choice.

You can use those funds for any purpose. Some popular uses for cash-out funds include:

  • Home improvement projects
  • Credit card consolidation
  • Auto loan payoff
  • Student loan refinancing
  • Prepay college tuition
  • Consolidate a first and second mortgage
  • Pay off personal debts

There is almost no limit to what you can use the money for. Homeowners who want to reduce monthly payments on other debt, or just have a little extra cash in the bank, should examine this loan type.

Verify your FHA cash-out eligibility (Sep 18th, 2020)

FHA cash-out refinance FAQ

What credit score is needed for an FHA cash-out refinance?

The official credit score minimum for all FHA loans is 500. However, a realistic minimum that lenders will actually allow is somewhere between 600 and 660 or higher.

This is because lenders often set higher minimums than does FHA. If one lender can’t do your loan, keep looking until you find one with more lenient standards.

Can you get a cash-out refinance with bad credit?

It is possible to get a cash-out refinance with bad credit. FHA will be your best chance at getting approved.

Most cash-out loans such as conventional or home equity loans require good credit. But FHA may allow you to be approved with a credit score in the low 600s or even high 500s. The catch is, most lenders will set their own minimum credit score for these loans.

Why have I heard that there are FHA 95% and 85% LTV cash-out refinances?

FHA used to allow a maximum 95% cash-out refinance prior to April 1, 2009. It then reduced the LTV limit to 85%. Then, on September 1, 2019, it was lowered again to 80%.

FHA lowered its cash-out refinance limits in a bid to make lending more secure. The more equity you’re required to leave in your home, the less a lender stands to lose if the mortgage ever defaults.

How much can you take out on a cash-out refinance?

The cash available depends on the home’s current value, your current loan, and, for FHA cash-out refinances, FHA loan limits. There’s no stated limit to the amount of cash you can take. You can get a new loan up to 80% of the home’s current value and are entitled to any amount of cash that yields.

Is money from a cash-out refinance taxable?

A cash-out refinance is a debt, not income. Therefore, it’s usually not taxable as income. However, consult a tax advisor before filing.

When can I do an FHA cash out after purchase? Is there a seasoning requirement for FHA cash out?

In order to use the FHA cash-out refinance, you must have lived in the residence you’re refinancing for at least 12 months. In addition, you must have paid all your mortgage payments for the past year within the month they were due.

Does FHA offer an equity loan?

Equity loans usually refer to a home equity line of credit or home equity loan. These are typically second mortgages that are placed on top of an existing primary mortgage.

These types of loans are not available via FHA. An FHA cash-out refinance would be the closest thing.

If you have an FHA loan currently, you could potentially get a standard home equity loan through a bank or local credit union. This would require good credit and decent equity in the home.

What is the maximum debt-to-income (DTI) ratio for an FHA cash-out loan?

FHA loans require a DTI of 43 percent or less, unless significant compensating factors are present, such as high credit scores or lots of equity in the house. In these cases, a DTI of up to 50 is possible.

DTI is the portion of your future housing and other debt payments compared to your pre-tax income.

For instance, if your income is $7,000 per month, a 43% DTI would be $3,000. In this example, you could have a $2,000 house payment and $1,000 combined payments for a car, student loans, or other debts.

Can you add a co-borrower to an FHA cash-out loan?

You may not add any borrower to the loan who does not live in the home. These are known as “non-occupant co-borrowers,” and are not allowed for cash-out loans.

Can you add a second mortgage to a cash-out loan?

Generally, you can’t add a second mortgage to the FHA cash out loan unless both loans add up to 80% of the home’s value or less. However, you may be able to keep an existing second mortgage and subordinate it under the new FHA loan. Subordinating involves receiving a document from the second mortgage lender stating it’s okay to get a new first mortgage.

What are current FHA loan limits?

In most areas of the country, the maximum FHA loan limit is $331,760 for 2020. However, maximum loan amounts go up to $ 765,600 for one-unit homes in places like Los Angeles, California, and New York, New York. 

Check your FHA cash-out loan eligibility

Homeowners who don’t have great credit but need to tap home equity are the best candidates for FHA cash-out loans.

For those with good credit and at least 20% equity, a conventional cash out refinance or home equity loan might yield lower costs.

Current FHA refinance rates are low, leading to more homeowner eligibility for this program.

If you’re interested in an FHA cash-out refinance, be sure to shop around with a few lenders and find the best rate  for your new loan.

Verify your new rate (Sep 18th, 2020)

Step by Step Guide

Refinancing a Home