Can You Refinance an FHA Loan and Get Cash-Out?

An FHA cash-out refinance allows homeowners with an existing FHA-insured mortgage to convert a portion of their home equity into cash. This process involves replacing the current loan with a new, larger FHA-backed mortgage. The difference between the original loan balance and the new, higher loan amount is then disbursed to the borrower as a lump sum.

FHA Cash-Out Refinance Requirements

Homeowners considering an FHA cash-out refinance must meet eligibility criteria. The property must be the borrower’s primary residence, meaning it cannot be an investment property or a second home. Borrowers also need to demonstrate a strong history of making mortgage payments. Generally, this requires no late payments for the past 12 months, or since the loan’s inception if it has been less than a year. If the loan was in forbearance, a 12-month waiting period from the completion of the forbearance period is required.

Credit score expectations for FHA cash-out refinances are generally more flexible than for conventional loans, with the FHA’s minimum credit score is 580. However, many lenders set their own minimums, often requiring scores in the 600-620 range, or even higher for more favorable terms. The debt-to-income (DTI) ratio compares monthly debt payments to gross monthly income. The FHA generally looks for a DTI ratio below 43%, though some borrowers with strong credit or significant equity may qualify with a DTI as high as 50%.

The borrower must have owned and occupied the home as their primary residence for a minimum period, at least 12 months, before applying. This is often referred to as a “seasoning requirement.” While the existing loan does not necessarily have to be an FHA loan, the new loan will be FHA-insured.

Determining Your Cash-Out Amount

The amount of cash a homeowner can receive through an FHA cash-out refinance is determined by the home’s appraised value and the FHA’s loan-to-value (LTV) limits. The FHA allows a maximum LTV of 80% for cash-out refinances.

The maximum new loan amount is calculated by multiplying the home’s appraised value by 0.80. For instance, if a home is appraised at $400,000, the maximum new FHA loan would be $320,000. The cash-out amount is found by subtracting the existing mortgage balance from this new, higher loan amount. If the existing mortgage was $200,000 in the example above, the borrower could receive $120,000 in cash before accounting for closing costs.

Applying for an FHA Cash-Out Refinance

The application process for an FHA cash-out refinance begins with finding an FHA-approved lender. Not all mortgage lenders offer FHA loans, so it is important to seek out those familiar with these specific products. After selecting a lender, borrowers submit an application. This involves providing personal and financial details, including income, employment history, and current debts.

Lenders will require various documents to support the application. Commonly requested items include recent pay stubs, bank statements, tax returns, and current mortgage statements. An appraisal of the home will be scheduled to determine its current market value.

The application then moves to the underwriting process, where the lender thoroughly reviews all submitted financial information, credit history, and property details to ensure compliance with FHA guidelines. A title search is also conducted to confirm clear ownership of the property. The final stage is closing, where all loan documents are signed, the old mortgage is paid off, and the cash-out funds are disbursed to the borrower.

Associated Costs and Mortgage Insurance

An FHA cash-out refinance involves several costs beyond the principal and interest of the new loan. Closing costs, which range from 2% to 6% of the new loan amount, are a primary expense. These costs can include origination fees, appraisal fees, title insurance, and credit report fees. Depending on the loan-to-value ratio, these costs can be rolled into the new loan amount, or they may need to be paid out-of-pocket at closing.

All FHA loans, including cash-out refinances, require mortgage insurance premiums (MIP). There are two components to FHA MIP. The Upfront Mortgage Insurance Premium (UFMIP) is a one-time fee, 1.75% of the loan amount. While it is due at closing, it is financed into the loan amount rather than paid separately.

The second component is the Annual Mortgage Insurance Premium (Annual MIP), which is an ongoing monthly premium. This annual premium, 0.55% of the loan balance, is divided into 12 monthly payments and added to the regular mortgage payment. For most FHA cash-out refinances, the Annual MIP is paid for the life of the loan.