FHA cash-out refinance requirements

Basic requirements for an FHA cash-out refinance are as follows:

• Credit score of at least 600 (in most cases)
• 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

FHA cash-out refinance 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.

How much cash can you take out 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Remember, you must leave 20% equity in your home after the cash-back is withdrawn.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:

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.

FHA cash-out refinance 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 on average.

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

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

The big advantage of using an FHA cash-out refinance over a conventional cash-out loan is that FHA has more lenient credit requirements.

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.

So 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 (wrapped into the loan amount)
• 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 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.

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.

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 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.

FHA cash-out refinance FAQ

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.