What Is an FHA Cash-Out Refinance?

An FHA cash-out refinance lets you tap into your home's equity. You'll need at least 12 months' worth of on-time payments and sufficient home equity to qualify.
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An FHA cash-out refinance allows you to draw on the equity you've built in your home. The FHA cash-out program can be a good option for homeowners who need funds for home improvements or to achieve a credit-building goal.

FHA loans, including refinances, are insured by the Federal Housing Administration (FHA). Relaxed qualification requirements generally make FHA loans an attractive option for borrowers who might not be eligible for a conventional loan. But your current mortgage doesn't need to be an FHA loan to qualify for an FHA cash-out refinance.

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How does an FHA cash-out refinance work?

In a cash-out refinance, you get a new FHA mortgage for more than the amount owed on your current mortgage. The "cash out" comes from the difference between your mortgage balance and present home value. You'll receive the surplus funds as a lump sum, usually several days after closing.

How to use funds from a cash-out refinance is up to you, but in general, the best reasons to tap home equity are those that make your financial position stronger. High-interest debt consolidation or value-adding home improvements both fit the bill. Since you're borrowing against your home with a cash-out refinance — a potentially risky move — carefully weigh the benefits and drawbacks.

How do you qualify for the FHA cash-out program?

To qualify for an FHA cash-out refinance, you’ll need to:

  • Be the owner-occupant, and the home must be your principal residence.

  • Be named on the current title, if you have an existing FHA loan.

  • Have lived in the home for at least 12 months.

  • Have made on-time mortgage payments for the past 12 months.

These rules apply to most homeowners, but additional requirements — or exceptions — may apply in certain circumstances. Your lender can help you understand which FHA cash-out refinance qualification requirements apply to your situation.

What is the maximum loan-to-value for FHA cash-out?

The maximum loan-to-value (LTV) ratio for an FHA cash-out is 80% for most homeowners. This means you can borrow up to 80% of what your home is worth, as long as you have at least 20% in equity.

Lenders will use your original mortgage and refinance amounts, along with any other loans that are secured by your home loan, to calculate your LTV. The combined mortgage amount can't exceed the FHA loan limit for your area. These vary by county; you can find your local FHA loan limit on the HUD website.

What does an FHA cash-out refinance cost?

All cash-out refinances have closing costs. Since we're talking about FHA closing costs, that will include paying for an FHA appraisal. (Yes, even if you already have an FHA loan, you'll need a new appraisal.)

You'll also pay an upfront FHA mortgage insurance premium. That premium is a lump sum equal to 1.75% of the loan amount. If you’re refinancing an FHA loan that’s less than three years old, a portion of the new upfront premium may be refunded.

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What are the pros and cons of an FHA cash-out refinance?

An FHA cash-out refinance will require you to shell out for a new appraisal and upfront mortgage insurance premium. You also could be making monthly FHA mortgage insurance payments for the life of the loan; in most cases, the only way to cancel FHA mortgage insurance is to refinance to a conventional mortgage.

But if you're planning to use the cash to improve your home or consolidate credit card debt, for example, the FHA cash-out program may be a good option.

As with FHA purchase mortgages, the credit score requirements for FHA cash-out refinances are generally lower than they are for conventional refis. Though the FHA's minimum credit score is 500, it's important to note that lenders may look for a higher score.

Keep in mind that you don't have to stick with your current lender when you refinance, and since rates, terms and fees can vary, comparison shopping is a smart move.

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