FHA cash-out refinance: Guidelines and interest rates for 2021

Tim Lucas
The Mortgage Reports editor

What is the FHA cash-out refinance?

The FHA cash-out refinance lets you refinance up to 80 percent of your home’s value in order to cash-out your equity.

Like other cash-out loans, the FHA cash-out refinance works by taking out a larger loan than what you currently owe on the home. You use this to pay off the existing loan, then pocket the difference as cash at closing.

FHA cash-out loans allow lower credit scores and more flexible debt ratios than other cash-out programs.

This makes it possible for homeowners to access their home equity at today’s low rates, even without great credit.

Verify your FHA cash-out refinance eligibility (Oct 27th, 2021)

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FHA cash-out refinance requirements

Borrowers applying for an FHA cash-out refinance need to meet standards set by the Federal Housing Administration.

Exact requirements can vary by lender, but typical guidelines for an FHA cash-out loan include:

  • Credit score of at least 600
  • Debt-to-income ratio below 43%
  • 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.

Qualifying borrowers can apply for the FHA cash-out refinance even if their 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 refinance eligibility (Oct 27th, 2021)

FHA cash-out refinance max 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.

Cash-out refinance loan limits

FHA allows a loan-to-value ratio of up to 80% when using the cash-out refinance program. That means your new loan can be up to 80% of the home’s appraised value.

However, the new mortgage must be within FHA’s loan limits. If your home value has appreciated significantly since you bought it, your cash-out loan amount may be capped by FHA’s loan limits.

In most areas of the country, the maximum FHA loan limit is $356,362 for 2021. However, maximum loan amounts go up to $822,375 for one-unit homes in high-value real estate markets like Los Angeles, California, and New York, New York. 

How much cash back can I get 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.

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

Youtube video thumbnail

FHA cash-out refinance rates

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

According to loan software company ICE Mortgage Technology, FHA fixed rates average about 10 to 15 basis points (0.10-0.15%) below conventional rates on average. 

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

However, borrowers need to 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.

Verify your FHA cash-out eligibility (Oct 27th, 2021)

Conventional cash-out refinance vs FHA cash-out

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-OutConventional Cash-Out
Minimum Credit Score 500 (official), 600-660 (likely)620 (official), 640-680 (likely)
Maximum LTV80%80%
Can Replace Any Loan TypeYesYes
OccupancyOwner-occupied onlyOwner, 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.

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 (typically included in the loan balance)
  • 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 than 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.

If you’re not sure which type of refinance is best for your situation, your loan officer can help you compare options and loan terms to make the right choice.

Verify your FHA cash-out eligibility (Oct 27th, 2021)

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 debt consolidation
  • Auto loan payoff
  • Student loan refinancing
  • Prepay college tuition
  • Consolidate a first and second mortgage
  • Pay off other high-interest debts at a low fixed rate

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 (Oct 27th, 2021)

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 fair 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.

Does FHA cash-out require a new appraisal?

Yes, FHA requires a new appraisal to determine the current market value of the home. The lender will calculate the LTV on your new mortgage loan based on the home’s recently appraised value.

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.

Is there a 100% cash-out loan?

Only the VA loan program offers a 100% cash-out refinance option. VA loans are restricted to veterans and active-duty military members. Those with qualifying service history will typically find the VA cash-out refinance to be a better deal than the FHA cash-out loan.

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.

How soon can I do an FHA cash-out refinance?

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 a home 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 ratio (DTI) for an FHA cash-out loan?

FHA loans require a DTI of 43 percent or less, unless significant compensating factors are present, such as a high credit score or lots of equity in the house. In these cases, a DTI of up to 50 percent 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 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. Only the FHA cash-out refinance allows you to receive cash back at closing.

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 (Oct 27th, 2021)