FHA cash out refinance guidelines and mortgage rates for 2020

Tim Lucas
The Mortgage Reports editor

Editor’s note: HUD, the adminstrator of FHA, has reduced the maximum FHA cash-out refinance loan-to-value to 80%, down from 85%. This took effect on September 1, 2019. 

FHA cash out loans: tap into your home equity

Today’s homeowner has an unparalleled amount of equity in their home.

According to the Federal Reserve, homeowners are sitting on $15 trillion in equity, an all-time high.

Many are wondering how they tap into that equity for home improvements, debt payoff, or other financial goals.

Fortunately, the FHA cash out loan allows you to open a loan of up to 80% of your home’s current value. You take the difference between your current loan amount and new loan amount in the form of cash.

Even lower credit borrowers can qualify, when they couldn’t get a home equity loan or conventional cash out loan. This is the loan that many homeowners have been waiting for.

Verify your FHA cash out refinance eligibility. (Aug 14th, 2020)

In this article:

An FHA cash out refinance is a government-sponsored home refinance program. It allows a homeowner to turn home equity into cash by taking out a larger loan than what they currently owe. The homeowner receives the difference in cash.

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Why use an FHA cash out loan?

FHA loans can turn your home equity into cash. FHA credit and loan-to-value guidelines are more flexible than conventional, helping more homeowners tap into their home’s equity.

Conventional refinance loans offer cash out as well. But the homeowner must have higher credit scores and more equity in the home to use it.

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:

  • 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 refinance eligibility (Aug 14th, 2020)

How do FHA cash out refinances work?

With a cash out refinance, you open a new FHA loan to replace an existing loan. Unlike the FHA streamline, you don’t have to refinance an existing FHA loan.

You could have a subprime, Alt-A, conventional, ARM, or another loan type, and replace it with new FHA financing.

In addition, you can turn your home equity into “spendable” cash. Many homeowners don’t know that FHA can be a cash-generating tool, but it can.

Here’s how it works:

 Current Value  $220,000
 New FHA Loan (max 80% of value)  $176,000
 Current Loan  -$140,000
 Closing Costs  -$3,000
 Proceeds  $33,000 

The maximum loan-to-value for an FHA cash out loan is 80%. So, you must have substantial equity to use it. This loan, then, is best for those with good equity in their homes, but don’t meet the credit score requirements for cash out conventional loans.

FHA cash out refinance calculator

Curious about how much you can borrow with an FHA cash out loan? Download and edit an FHA cash out calculator below.

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

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:

  • 1.75% of the new loan amount upfront (wrapped into the loan amount)
  • 0.80% 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.

  Conventional Cash Out  FHA Cash Out
 Minimum credit score   620 (official), 640-680 (likely)  500 (official), 600-660 (likely)
 Maximum LTV  80%  80%
 Can replace any loan  Yes  Yes
 Occupancy  Owner, 2nd home, rental  Owner-occupied only
Verify your FHA cash out refinance eligibility (Aug 14th, 2020)

FHA cash out on homes owned less than one year

If the mortgage has been open for at least 12 months, the last year of mortgage payments must have been made on time.

If less than a year, the homeowner must have made at least six payments on their current mortgage.

For instance, you purchased your home in February. Your first payment is in April. You must make on-time payments from April to September before being eligible for a cash out loan. That rule applies whether you have an FHA loan currently or not.

If you’ve owned your home less than twelve months, you might want to wait to apply. For properties owned less than one year, the maximum FHA mortgage is equal to the lesser of:

  • The current appraised value
  • The original purchase price

For instance, you purchased your home 11 months ago for $250,000. The home is now worth $275,000. The lender will use a value of $250,000 unless you apply after 12 months have passed since the purchase.

If you wait one year after purchase, the maximum new loan amount is 80% of the current appraisal value.

FHA cash out mortgage 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.

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 
 Rate  5.00%* 5.25%*
 Mortgage insurance  0.80% 0%
 Effective rate 5.80% 5.25%

*Example rates only. May not be currently available

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

FHA mortgage rates have been holding low. It’s a good time to consider locking an FHA cash out refi. Rates are lower than those for other debt, such as credit cards, some auto loans, personal loans, and more. A debt consolidation strategy could be the right move.

Personal loans as an alternative to FHA cash-out

There are a few reasons you may not qualify for an FHA cash-out loan. The property may be in disrepair or the lender may not approve it for another reason.

But consider alternatives if this is the case.

Personal loans aren’t reliant on the property. They are based on your credit profile, income, and assets.

You can receive up to $50,000 (and $100k in some cases), and approval can happen in days, not weeks.

FHA cash out refinance FAQ

Below are current FHA cash out refinance guidelines including credit score requirements, LTV maximums, and more.

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.

What is the maximum loan-to-value for FHA cash out refinances?

The maximum LTV for FHA cash out refinances is 80%. The exception is when the property has been owned less than one year. In that case, the maximum new loan amount is the lesser of the new value or original purchase price.

 Owned home 12+ monthsOwned home <12 months
 Original purchase price$250,000 $250,000
Current value$275,000$275,000
Eligible value$275,000$250,000
Maximum new loan (80% of eligible value) $220,000$200,000
Verify your FHA cash out refinance&nbsp;eligibility (Aug 14th, 2020)

Why have I heard that there is 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%.

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

The cash available is dependant 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 entitle 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?

There is no minimum amount of time since you purchased the home required before you apply for an FHA cash out. However, if you purchased the home in the last 12 months, the maximum loan will be 80% of the original purchase price.

Most home buyer who purchased that recently won’t have enough equity to use this loan.

What are general FHA seasoning requirements?

  • Standard FHA refinance: No seasoning requirement
  • FHA streamline refinance: Six payments and 210 days have passed since opening the loan
  • FHA cash out: No seasoning requirement; 12 months have passed since the home purchase to use new value

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 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 which 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.

Learn more:

FHA mortgage insurance refunds

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

FHA loans require a DTI 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 $510,400 for 2020. However, maximum loan amounts go up to $510,400 for one-unit homes in places like Los Angeles, California, and New York, New York. Check our loan limits calculator.

The bottom line

Homeowners who don’t have great credit but need fast cash are the best candidates for FHA cash out loans. Additionally, homeowners without a full 20% in equity but still need cash for home improvements or other purposes will find this loan helpful.

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

Check your FHA cash out loan eligibility

FHA loan rates are low, leading to more homeowner eligibility for this program. Lenders are loosening standards, and are eager for FHA cash out business. Homeowners can get competing quotes and go with the rate that works best for them.

Get an FHA loan quote now, which includes an eligibility check and comes with no obligation if you are not satisfied with your rate.

Verify your FHA cash out refinance&nbsp;eligibility (Aug 14th, 2020)

Step by Step Guide

Refinancing a Home