FHA cash-out refinance: What to know

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.

What is an FHA cash-out mortgage refinance?

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:

• Paying off high-interest debt
• Home improvements and repairs
• Paying for medical expenses
• Supplementing retirement income
• Making a down payment on another property

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.

What types of mortgages can I refinance?

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 cash-out refinancing is best for bad to fair credit borrowers

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.

Time to refinance?

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Borrow up to 80% of your home’s appraised value with an FHA refinance

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 cash-out refinance fees

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:

• Closing costs. These apply to all mortgages and typically run between 2% and 5% of the total loan amount depending on the state, and include things like:
  • Credit report
  • Appraisal fees
  • Title search and title insurance
  • Property inspection
  • Recording and survey fees
  • Transfer taxes
  • Attorney fees
• Upfront Mortgage Insurance Premium (UFMIP). This insurance cost must be paid at the time of loan closing. UFMIP costs 1.75% of the total loan amount, but it can be rolled into your mortgage so you don’t need to pay it out of pocket.
• Mortgage Insurance Premium (MIP). In 2022, this cost is .85% of the total loan amount and is part of your monthly mortgage payment. MIP can’t be dropped during the loan term, even if you have 20% equity in your home.

Get an FHA cash-out refinance in 5 steps

Getting an FHA cash-out refinance is similar to any other type of mortgage refinance. Here’s how to get one in 5 steps:

1. Compare lenders. FHA cash-out refinance loans are offered by banks, credit unions and online lenders. Shop around, get prequalified with a soft credit pull and compare at least three or four quotes to find the best deal.
2. Apply for the loan. After getting prequalified with several lenders and comparing rates, apply to the lenders with the best rates and lowest fees. Each application involves a hard credit pull, but as long as these are all within a 45-day window, it counts as a single credit pull — which minimizes the impact on your credit score.
3. Provide requested documents. Every lender is different, but be prepared to provide tax returns and proof of income for the past two years. Lenders will also ask for recent bank statements, pay stubs and a copy of your current mortgage statement, among other documents.
4. Get a home appraisal. FHA appraisals must be conducted by an FHA-approved appraiser. Anything that makes the house unsafe, like structural damage, leaks or a termite infestation, can cause the appraisal to fall through and must be fixed before a loan is extended.
5. Finalize your loan. Go over your closing paperwork and provide any final documents, if requested. Sign the paperwork and wait for the loan to close and your cash-out funds to be sent to your bank account.

FHA cash-out refinance requirements

While FHA loans have more flexible requirements than conventional loans, be prepared to meet the following requirements:

• Maximum LTV of 80%
• Minimum 580 FICO score
• Debt-to-Income (DTI) ratio of less than 43%
• Home must be your primary residence
• Must be employed and have regular income

What documents do I need?

Requirements vary by lender, but these documents are required in most cases:

• Social Security number
• Address history for the past two years
• Employment history for the past two years and gross monthly salary
• Current pays stubs and W-2 or 1099 forms for the past two years
• Personal tax returns for the past two years
• Checking and savings account information
• Information about your current mortgage and other loans
• Certificate of Eligibility and DD-214 (for veterans only)

What’s the difference between an FHA cash-out refinance and an FHA streamline refinance?

There are three major differences between an FHA cash-out refinance and an FHA streamline refinance:

1. You can’t get cash out with an FHA streamline refinance.
2. FHA streamline refinances are only for existing FHA loans, while FHA cash-out refinances have no restrictions on the type of loan refinanced.
3. An FHA streamline refinance requires less paperwork than the FHA cash-out option and has easier eligibility requirements — and you don’t need to get an appraisal in most cases.

Learn more about the benefits of an FHA streamline refinance and find out if you qualify.

Pros and cons of an FHA cash-out refinance

FHA cash-out refinances have advantages and disadvantages to consider:

Alternatives

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:

• Home equity loan. Borrow against the equity in your home with a one-time, lump-sum payment that works like a five- to 30-year term loan. Closing costs and fees are generally much lower with a home equity loan than a mortgage refinance.
• Home equity line of credit (HELOC). Borrow against the equity in your home with a revolving line of credit good for 10 years. Many HELOCs come with no closing costs and can be paid back over 20 years. Compare HELOCs to find the best rates.
• Conventional mortgage refinance. A conventional mortgage refinance might make more sense than an FHA refinance if you have good credit or 20% equity built up in your home — you don’t have to pay UFMIP or MIP.
• Home equity sharing. A lender gives you a percentage of your home’s value in cash with no payments for several years. Afterward, you must pay back the loan with appreciation, if any. Hometap offers equity sharing, but it comes with risks — including the loss of your home if you can’t pay back the loan.
• 0% intro rate credit cards. Borrowing against a credit card is convenient, and with a 0% introductory rate for a set time, it can be a better deal than other types of short-term loans. Compare the best introductory 0% APR credit cards.
• Borrow against your 401(k). Borrowing against your retirement account gives you access to quick cash and isn’t taxable unless you go over the loan limits and don’t follow the repayment rules. Check with your financial advisor for more information.
• FHA-HAMP. This stands for FHA-Home Affordable Modification Program and is for FHA homeowners in financial distress. It allows FHA borrowers to modify their FHA loans to reduce monthly mortgage payments and avoid foreclosure.

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.

Bottom line

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.