FHA Cash-Out Refinance: Guidelines And Requirements

Looking to upgrade your kitchen situation? Ready to turn that nursery into a guest suite? If you are looking to free up some funds for projects and lower your monthly interest rate at the same time, an FHA cash-out refinance might be just the solution.

In addition, this financial tool can be a great idea if you aren’t looking to make home improvements. You can use the money from an FHA cash-out refinance to help you reach your home and financial goals!

What Is An FHA Cash-Out Refinance?

A cash-out refinance allows homeowners to refinance their existing mortgage and get some cash at the same time. To accomplish this, they take out a loan with a larger principal balance than their current loan.

Let’s look at an example to illustrate how a cash-out refinance works: Say you owe $250,000 on your existing mortgage. To free up some cash, you might refinance to a new mortgage loan worth $300,000. After paying $4,000 in closing costs, you’d be left with $46,000 in a lump sum payment. This is the difference between the $250,000 you owe and your new $300,000 mortgage minus your $4,000 in closing costs.

You can use that money for home improvements, paying off student debt, paying down credit card debt, or something else that might help you reach your goals.

The difference between a traditional cash-out refinance and an FHA cash-out refinance is that an FHA loan is backed by the Federal Housing Administration. This means the lender has some additional assurances that they will get their money if you default on your loan.

Since there is less risk for the lender compared to conventional loans, they are able to approve you with a lower credit score. One drawback is that homeowners who do an FHA cash-out refinance need to pay mortgage insurance for 11 years, so be sure to include that in your calculations when deciding.

Another slightly different option to consider is an FHA Streamline Refinance. If you already have an FHA loan, an FHA Streamline Refinance allows you to refinance with a simpler process that cuts down on time, paperwork and stress. For example, an FHA Streamline Refinance can bypass the refinance appraisal process.

How Does An FHA Cash-Out Refinance Work?

If you have enough equity in your home, the minimum credit score required, and a steady monthly income, you can apply for an FHA cash-out refinance. Simply find a mortgage lender that works with FHA loans, like Rocket Mortgage^® and begin the application process.

To begin, you will need to complete a Uniform Residential Loan Application which includes providing your full name, social security number and home address. You will also need to report your monthly income and current debt.

The lender will process this information and then check your three credit reports with the national credit bureaus (TransUnion^®, Experian™, and Equifax^®) and check your FICO^® Score.

Once approved, you will close on the loan and pay closing costs (if there are any). Your current mortgage will be replaced by your new FHA loan and you will receive your cash!

FHA Cash-Out Refinance Guidelines

Let’s take a look at the requirements for getting approved for an FHA cash-out refinance:

Type Of Property

Homeowners can only take out an FHA cash-out refinance for primary residences and not for investment properties or vacation homes.

Time In Residence

To take out an FHA cash-out refinance, homeowners are required to occupy their home for at least 12 months. There are some exceptions to this, like for inherited properties.

Credit Score

A minimum 500 credit score is required by the Federal Housing Association (FHA) but private lenders often have their own credit requirements. At Rocket Mortgage, the minimum credit score is usually 620 if you're looking to do a cash-out refinance on FHA. The exception is if you're a client of theirs using the funds to pay off debt at closing, in which case the qualifying score is 580.

Having a higher score is better though. Achieving and maintaining a good credit score when obtaining an FHA cash-out refinance will result in a better interest rate for the loan.

Loan-To-Value Ratio (LTV)

Your LTV measures the difference between what you owe on your mortgage and what your home is currently worth. This is also referred to as how much equity you have in your house. 

Homeowners can get an FHA cash-out refinance with a maximum LTV of 80% of the home’s current value. In other words, the amount of money owed on your current mortgage cannot exceed 80% of your home’s worth.

Mortgage Payment History

All mortgage payments over the last 12 months need to be paid in order to qualify for an FHA cash-out refinance. So, if you have paid your mortgage on time and in full for the last year, you can apply.

FHA Cash-Out Refinance Pros And Cons

An FHA cash-out refinance can be a great benefit to many homeowners, but it’s not for everyone. Let’s take a look at some of the pros and cons so you can make the best decision for your individual situation.

Benefits Of An FHA Cash-Out Refinance

• Relaxed borrower requirements: FHA cash-out refinance requirements are less stringent than the refinance requirements associated with a conventional mortgage.
• Flexibility on spending: You can use the funds for an FHA cash-out refinance to meet your financial and home-related needs. Some other loans can only be used for specific purposes, like home improvements.
• New loan repayment terms: With a refinance, your loan terms will change. This could mean a lower monthly payment or a shorter payment term, depending on your situation.
• Non-FHA mortgages can qualify: You can do an FHA cash-out refinance even if your current loan is not backed by the Federal Housing Administration.

Drawbacks Of An FHA Cash-Out Refinance

• Increased mortgage debt: While your monthly payments may decrease, the principal on your loan will increase with an FHA cash-out refinance.
• Closing costs and other fees: FHA cash-out refinancing isn’t free, so you will have to calculate closing costs to see if it’s worth it.
• Mortgage insurance premium payment: FHA cash-out refinances require 11 years of mortgage insurance payments.

FHA Cash-Out Refinance FAQs

What does an FHA cash-out refinance cost?

This depends on the lender and your personal financial information. Get a quote here.

When does it make sense to refinance my FHA loan?

When you need a large chuck of cash and interest rates are relatively low.

Do I need a new home appraisal for an FHA cash-out refinance?

Yes, unless you do an FHA Streamline Refinance as previously discussed.

Will I have to pay closing costs on an FHA cash-out refinance?

Usually, yes. You’ll have to pay closing costs on an FHA loan and when refinancing. Although there are some exceptions, depending on the terms offered by your lender.

What is the most money I can get from an FHA cash-out refinance?

You can get 80% of your home’s overall value.

The Bottom Line

FHA cash-out refinancing can be a great way to secure immediate funds and potentially lower your monthly mortgage payment. However, there are some costs and other drawbacks to be aware of. Take what you have learned here, weigh the pros and cons, and consider whether an FHA cash-out refinance might be a good decision for you and your family.

Still not sure? Consider other options compared to refinancing to decide which choice is right for you.