What Is the FHA Cash-Out Plan (FACOP)?

An FHA Cash-Out Refinance allows homeowners to convert a portion of their home equity into usable cash. This financial tool enables individuals with an existing mortgage, whether FHA or conventional, to refinance into a new, larger FHA-insured mortgage. The primary purpose of this refinance is to provide a lump sum of cash, representing the difference between the new loan amount and the payoff of the original mortgage, after accounting for associated costs. Backed by the Federal Housing Administration (FHA), these loans often feature more flexible qualification criteria compared to some conventional loan products, such as potentially lower credit score requirements and higher loan-to-value limits.

Understanding the FHA Cash-Out Refinance

This process involves paying off the original mortgage, which can be an FHA loan or a conventional one, and then creating a new FHA-backed loan for a higher amount. The additional funds beyond the original mortgage payoff are provided directly to the borrower as a lump sum of cash, after covering closing costs and other fees.

Homeowners typically pursue this type of refinance for various financial objectives. Common reasons include consolidating higher-interest debts like credit cards or personal loans, funding significant home improvements or renovations, or covering other substantial expenses such as educational costs. The Federal Housing Administration’s role in insuring these loans reduces the risk for lenders, which can translate into more accessible terms for borrowers who might not qualify for conventional cash-out options.

A distinguishing feature of FHA loans, including cash-out refinances, is the requirement for mortgage insurance premiums (MIP). This includes an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium. The UFMIP is a one-time fee, typically 1.75% of the loan amount, which can often be financed into the new loan. The annual MIP is paid monthly and continues for the life of the loan or for a specified period, depending on the loan-to-value (LTV) ratio and original loan term.

Key Eligibility Requirements

To qualify for an FHA Cash-Out Refinance, both the borrower and the property must satisfy specific criteria set forth by the FHA. Lenders may also impose their own additional requirements.

Borrower eligibility typically includes credit score, debt-to-income (DTI) ratios, and payment history. While the FHA’s minimum credit score can be as low as 500, many lenders require a score of 580 or higher for cash-out refinances due to their higher risk profile. The borrower’s DTI ratio, which compares monthly debt payments to gross monthly income, generally needs to be below 43%, though some lenders might approve ratios up to 50% for applicants with strong compensating factors. Borrowers must demonstrate a history of timely mortgage payments on their existing loan, usually requiring no 30-day late payments in the preceding 12 months.

Property eligibility also has specific conditions. The home must be the borrower’s primary residence, and this program is not available for second homes or investment properties. Borrowers are generally required to have lived in the property as their primary residence for a minimum of 12 months prior to the loan application date, though exceptions may apply for inherited properties. The property itself must meet FHA’s minimum property standards, which is assessed through an appraisal conducted by an FHA-approved appraiser.

Determining Your Cash-Out Amount

The amount of cash a homeowner can receive through an FHA Cash-Out Refinance is primarily determined by the property’s appraised value and the maximum allowable loan-to-value (LTV) ratio. For FHA cash-out refinances, the maximum LTV is generally limited to 80% of the property’s current appraised value.

To calculate the maximum loan amount, the appraised value of the home is multiplied by this 80% LTV limit. From this maximum new loan amount, the outstanding balance of the existing mortgage is subtracted, and the remaining figure represents the potential cash-out amount before considering closing costs. For example, if a home is appraised at $300,000, the maximum new FHA loan would be $240,000 (80% of $300,000). If the existing mortgage balance is $150,000, the potential cash-out would be $90,000.

The new FHA loan amount must also adhere to the FHA’s county loan limits, which vary by location and property type. Additionally, closing costs and the FHA’s upfront mortgage insurance premium (UFMIP), typically 1.75% of the loan amount, are often financed into the new loan. This financing reduces the net cash available to the borrower, as these costs are added to the loan principal rather than being paid out of the cash-out proceeds.

The Application and Closing Process

Initiating an FHA Cash-Out Refinance begins with an initial inquiry and pre-qualification with FHA-approved lenders. This allows borrowers to understand potential eligibility and compare offers.

Following pre-qualification, the borrower proceeds to the application submission phase. This involves completing a Uniform Residential Loan Application and providing financial documents. Necessary documentation typically includes proof of income, such as W2s and recent pay stubs, bank statements, and statements for the existing mortgage.

The home appraisal and underwriting are key steps. The lender orders an appraisal by an FHA-approved appraiser to determine the property’s market value and ensure it meets FHA minimum standards. Underwriting involves a thorough review of all submitted documentation to confirm borrower and property eligibility.

The final stage is the closing process. The borrower signs the loan documents, formalizing the new mortgage. Closing costs are either paid at this time or financed into the new loan. After closing, the original mortgage is paid off, and the cash-out portion is disbursed to the borrower. Borrowers typically have a three-day right of rescission for primary residence refinances.