The FHA cash-out refinance program is for borrowers who want to refinance their existing mortgage and get cash out at the same time. FHA loans are guaranteed by the Federal Housing Administration and offer competitive rates and more lenient requirements than conventional loans — making them ideal for people with less-than-perfect credit.
An FHA cash-out mortgage refinance is a government-backed program that replaces your existing mortgage with a new FHA loan with a higher amount. The difference between your old mortgage and the new one is the “cash out” portion, which can be used for any purpose and the money isn’t taxable by Uncle Sam.
Some common uses for an FHA cash-out refinance include:
Keep in mind it’s best to do a cash-out refinance when you can reduce your interest rate and you plan on staying in the house long enough to recoup your closing costs in the form of reduced monthly payments. Otherwise, it may not be worth it.
You can refinance any type of mortgage to an FHA loan, including conventional, VA and USDA loans. But you’re on the hook for closing costs, a 1.75% Upfront Mortgage Insurance Premium (UFMIP) and a monthly Mortgage Insurance Premium (MIP) of .85%.
FHA loans are designed to meet the needs of lower credit borrowers. Even bad and fair credit borrowers with scores as low as 500 may qualify for an FHA loan — although most lenders want to see a minimum score of 580 and a debt-to-income (DTI) ratio of under 43%. By comparison, conventional loans typically require a credit score of 620 and up.
If you have good credit, a conventional mortgage refinance could land you a better rate with fewer fees. According to a Guaranteed Rate loan officer I spoke with, borrowers with credit scores of 620 and up can qualify for a conventional loan, but the loan’s LTV may be closer to 70% and your debt-to-income (DTI) ratio can’t exceed 35%. But if your score is above 670, you may qualify for a bigger amount, even with a higher DTI.
But if you just want cash out, a home equity loan or home equity line of credit (HELOC) can be a cheaper option than a refinance since these often have no closing costs or fees. As always, compare multiple lenders to find the best rates and fees for your situation.
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With an FHA cash-out mortgage refinance, you can borrow up to 80% of your home’s appraised value.
Here’s an example of how much you can cash out, assuming closing costs of 3%. Your actual closing costs may be lower or higher, affecting the amount of cash you can get.
| Your current loan balance | $150,000 |
| Your home’s appraised value | $250,000 |
| Your new loan amount at 80% LTV based on appraised price of $250,000 | $200,000 ($250,000 x .80) |
| Estimated closing costs (3%) | $6,000 ($200,000 x .03) |
| Upfront mortgage insurance premium (1.75%) | $3,500 ($200,000 x .0175) |
| Total cash out | $200,000 (new loan amount) – $150,000 (old loan balance) – $6,000 (closing costs) – $3,500 (FHA funding fee) = $40,500 Total cash out |
FHA loans are typically more expensive than conventional loans due to the “FHA funding fee” — which is insurance to protect the lender. Because FHA borrowers tend to have lower credit, these insurances guarantee the loan in case the borrower defaults.
You can expect to pay the following fees when doing an FHA cash-out refinance:
Getting an FHA cash-out refinance is similar to any other type of mortgage refinance. Here’s how to get one in 5 steps:
While FHA loans have more flexible requirements than conventional loans, be prepared to meet the following requirements:
Requirements vary by lender, but these documents are required in most cases:
There are three major differences between an FHA cash-out refinance and an FHA streamline refinance:
Learn more about the benefits of an FHA streamline refinance and find out if you qualify.
FHA cash-out refinances have advantages and disadvantages to consider:
Whether you don’t want to pay refinance fees or don’t have enough equity built up, an FHA cash-out refinance isn’t the only way to access cash.
Here are some alternatives to consider:
If you’re still on the fence, learn more about home equity loans vs. HELOCs vs. cash-out mortgage refinancing to determine which is best for you.
An FHA cash-out refi can be a smart choice if you’re a lower credit borrower needing access to cash and you can secure a lower rate at the same time. But if you don’t plan on staying in the house long enough to recoup your closing costs, consider a home equity loan, HELOC or other type of loan instead.
Learn more about the benefits and drawbacks of FHA mortgages to decide if getting an FHA cash-out refinance is the right choice for you.
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