What Is the FHA Cash-Out Refinance and How Can You Get It?

According to a report by Mortgage Technology, cash-out refinances increased by 90% in the last quarter of 2023. Homeowners are more focused on tapping equity instead of considering other loan options.

Cash-out is one of the most preferred refinancing methods to manage existing mortgage payments. It also helps you get additional funds to cover certain expenditures. You can borrow cash-out loans based on your home equity and get extra cash.

If you want funds for home renovation, college education, or to pay the credit card debt, FHA cash-out refinance can be the answer. Let’s see the qualifying criteria and processes for FHA cash-out refinance loans.

What Is the FHA Cash-Out Plan?

FHA cash-out plan is a refinancing option provided by the Federal Housing Administration. Under this plan, you can use up to 80% of your home equity to access a lump-sum amount. 

This program replaces your existing mortgage with a new, larger FHA-insured loan at a lower interest rate ((0.10%–0.15% less than conventional loans). You can use the new loan amount to pay off your existing mortgage and get the difference in cash.

The FHA refinance cash-out guidelines involve lower credit score (minimum 580) requirements and debt ratio (maximum 43%) than conventional cash-out refinances. Therefore, cash-out refinance can be beneficial if you don’t have a good credit score or have limited equity. 

Is the FHA Cash-Out Plan Legit?

Yes, FHA cash-out loans are legit. Verified private banks, credit unions, and online lenders offer FHA cash-out plans. Some notable FHA lenders are Wells Fargo, Bank of America, Citizens Bank, etc. 

How Does a Cash-Out Refinance Work?

With FHA cash-out refinance, you turn your home equity into active funds by replacing your existing mortgage with a new one. You get the difference between the two mortgage amounts in cash. However, you must satisfy income, credit, loan amount, and minimum equity requirements. 

FHA cash-out refinance gives a new interest rate, loan period, and monthly payment amount upon acceptance. You can choose an FHA mortgage even if you first bought your house with a conventional loan. You don’t necessarily need an existing FHA loan to take an FHA cash-out refinance. 

FHA Refinance Cash-Out Guidelines

Here are the eligibility criteria to qualify for FHA cash-out refinance.:

1. Credit Score

FHA cash-out refinance requires a minimum credit score of 500, but lenders often set higher requirements. A 580 score is accepted for debt consolidation, while you’d need a 620 or higher credit score for other purposes. Moreover, mortgage rates decrease if you have a higher credit score.

2. Loan-To-Value (LTV) Ratio

The LTV ratio compares your house to your debt. It tells the lender whether the loan amount is proportionate to the market value of your property. So, the lender is aware of the risk associated with the loan. 

You can calculate it by dividing the loan amount by the property value. For instance, if your house is worth $200,000 and your mortgage is $120,000, the LTV is 60% (200,000/120,000 x 100). With an FHA cash-out program, you can borrow up to 80% of your home’s LTV. 

3. Seasoning Requirement

You must have lived in your home for at least 12 months to qualify for FHA cash-out refinance. However, inherited properties are an exception.

4. Payment History

You should have made mortgage payments timely in the past 12 months. Even with a short mortgage history, you can take cash out if you have paid your mortgage payments on time for six months. 

5. Debt-to-Income Ratio 

The debt-to-income ratio should not exceed 43%. Lenders calculate the debt-to-income ratio by comparing your monthly loan installment with your gross monthly income. 

For example, your monthly debt is $2000 and gross monthly income is $6000. Then, the debt-to-income ratio is 30%. A lower DTI ratio indicates a better ability to pay off monthly debt.  

6. Equity Percentage 

You must own at least 20% equity after the FHA cash-out refinance. 

What is the Process for FHA Cash-Out Refinance?

Here is the step-by-step process to get cash-out FHA refinance:

Step 1: Estimate Home Equity

Calculate home equity by subtracting existing mortgage and liens from the property’s market value.

Home Equity = Market Value of Home − Outstanding Mortgage − Other Liens

For example, your home’s market value is $500,000, the remaining mortgage amount is $300,000, and the lien is $20,000.   

Home Equity = $500,000 – $300,000 – $20,000 = $180,000

Now calculate home equity percentage. Based on this calculation, your home equity percentage would be ($180,000/$500,000) * 100 = 36%.

» How Much Is My Home Worth? You can estimate your home equity with Houzeo’s most accurate home value estimator.

Step 2: Choose an FHA mortgage lender

Find an authorized mortgage lender to offer FHA refinance loans. The options include credit unions, banks, and other financial institutions.

Step 3: Fill out the application process

Fill out a Uniform Residential Loan Application with personal and financial details. The lender analyzes the FICO score after getting credit reports.

Step 4: Sign and Close the loan

Once your loan is approved, proceed to the closing stage to sign the paperwork and pay closing costs. For primary residences, a 3-day reconsideration period is available.

How Much Money Can You Get With an FHA Cash-Out Refinance?

You can get up to 80% of your home equity’s value in FHA cash-out refinance. Here is an example:

Your home’s market value is $350,000, but you owe a $150,000 mortgage. 

Equity = $350,000 – $150,000 = $200,000. 

Maximum mortgage amount = $280,000 (up to 80% of $350,000)

You use this money to pay off the $150,000 existing mortgage.

Remaining lump-sum cash = $130,000

You can use the remaining amount for personal expenses or home improvement.

This calculation is only an estimate and not an actual figure. You should speak with a mortgage lender and hire an appraiser to determine the precise worth of your home and the closing costs related to your refinance.

How Much Does an FHA Cash-out Refinance Cost?

An FHA cash-out refinance costs between 2% and 6% of the mortgage value as closing costs. Closing fees also include an upfront 1.75% FHA Mortgage Insurance Premium (MIP) of the loan amount.

For example, if you have a $250,000 loan, closing costs will range from $5,000 to $15,000, and MIP will be $4,375. The lender can impose additional costs for appraisals and title searches. 

FHA Cash-Out Refinance vs. Other Loan Types

You can also consider other cash-out refinance options, such as conventional cash-out refinance or streamline refinance. Each has specific benefits and considerations. Let’s see how they differ from FHA cash-out refinance. 

FHA Cash-Out vs. Conventional Cash-Out Refinance

In FHA cash-out, you have to pay MIP, irrespective of the down payment amount. Moreover, you will most likely have to pay MIP throughout the entire duration of the loan.

However, conventional mortgages with an 80% Loan-to-Value (LTV) ratio do not need private mortgage insurance. You can also cancel MIP once you own 20% home equity.

If you have a good credit score, taking other loans instead of FHA loans will be better. Contact your accountant or financial advisor to learn how refinancing might affect your savings capacity. 

FHA Cash-Out vs. FHA Streamline Refinance

FHA streamline refinance can be a simpler option for reducing monthly payments. It involves a simplified procedure with less paperwork and underwriting. 

Some solutions may not require credit qualification, so you can apply even with a low credit score. However, only current FHA borrowers are eligible for FHA streamline refinances. 

Aspect	FHA Cash-Out Refinance	FHA Streamline Refinance
Credit score prerequisite	Generally requires a credit score of 620 (sometimes lenders might accept a lower score)	No need for documentation of credit scores
Additional funds	Yes, you can access additional funds.	You cannot obtain additional cash.
Appraisal	Requires an appraisal	Appraisal is not required
Who can borrow?	Available to borrowers with any existing mortgage (conventional, FHA, VA, or USDA).	Exclusive to borrowers with an existing FHA mortgage.

Is An FHA Cash-Out Refinance Right For You?

FHA cash-out program has more lenient lending requirements in comparison to conventional cash-out refinances. Hence, you can leverage cash-out refinance to meet your financial obligations. 

If your debt ratio is higher or your credit score is lower, the FHA cash-out refinance could be a better option, even if it entails more insurance. On the other hand, borrowers with good credit and 20% equity would benefit financially more from a conventional cash-out refinance. 

Once you have identified that you want to go ahead with cash-out refinance, you can start with looking for FHA cash out refinance lenders that meet your requirements. Houzeo can simplify this process for you with its exquisite repository of mortgage lenders near you!

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