FHA Cash-Out Refinance Loan Requirements


If you have an FHA loan, then you may qualify for a cash-out refinance.

Cash in on the built-up equity you have in your home.

You can use the cash to renovate your home, consolidate debt, or just about anything you want.

In this article, we’re going to go over the pros and cons of FHA cash-out refinance loans and explore alternative options.

Cash-Out Refinance Rates (December 2020)

Loan Term

Interest rate

APR

30-year fixed-rate

3.46%

3.62%

15-year fixed-rate

3.16%

3.39%

5/1 adjustable-rate

3.62%

3.94%

What is a Cash-Out Refinance?

FHA loans require a 580 credit score in order to qualify for the 3.5% down payment. The credit requirement for FHA cash-out refinancing is the same, however, lenders prefer FHA borrowers to have a 620 score to qualify.

You must occupy the home as your primary residence and be current on your mortgage payments with no late payments in the past 12 months to be eligible.

FHA cash-out refinancing is for borrowers with any type of home loan. You do not need to currently have an FHA loan to qualify for the FHA cash-out refinance loan program.

How Much Can You Borrow

Cash-out refinancing with FHA allows you to borrow up to a maximum loan-to-value ratio of 80%.

For example: If your home’s market value is $200,000 and you owe $100,000  you will be able to get a loan up to $160,000 which means you can put up to $60,000 cash in your pocket, minus closing costs.

Current Home Value

$200,000

Current Loan Principle Balance

$100,000

New Loan (max 80% market value)

$160,000

Payoff Current Loan

-$100,000

Subtract Closing Costs

-$4,500

Max Cash-Out Amount

$55,500

You need at least a 30% equity stake in your home for a cash-out refinance to be an option. If you do not have at least 30% in equity then cash-out refinancing won’t make any sense cause you can only borrow up to 80% of the home’s market value.

FHA Cash-Out Refinance Pros and Cons

FHA cash-out refinance loans are a great option for homeowners who need extra cash. You can make home repairs or renovate the home to increase its market value. You can use the low-interest debt to pay off high-interest debt, like credit cards, student loans, and personal loans.

However, there are many downsides to cashing in on your home’s equity. For one, you’re losing an asset and gaining more debt. Not just regular debt, but debt secured by your home. If you’re unable to make the payments for any reason, your home is in jeopardy of being foreclosed on.

Pros

Cons

  • Low fixed interest rate

  • Pay offl high-interest debts

  • Payments are tax-deductible

  • Have a single mortgage payment

  • Closing costs are as much as a new mortgage

  • Reduces the amount of equity in your home

  • Home at risk of foreclosure if you can't make the monthly payments

  • May increase your mortgage payments

FHA Cash-Out Refinance Requirements

To be eligible you’ll need to meet the basic requirements:

2020 Cash-Out Refinance Requirements

• 620 credit score

• No mortgage late payments in past 12 months

• At least 30% equity in the home

• 50% debt-to-income ratio

• Available for primary residence only

• Borrow up to 80% LTV ratio

Getting Rid of Mortgage Insurance

Mortgage insurance premium (MIP) is changed annually on FHA-insured mortgages regardless of the loan-to-value ratio. One of the main reasons borrowers look into FHA refinancing is to eliminate the mortgage insurance premium fee.

Co-Borrowers

Adding a co-borrower or co-signer that was not on the original FHA mortgage is not permitted. If you’re using a non-occupant co-borrower, they should be on the original FHA mortgage loan.

Fixed-Rate and Adjustable-Rate Mortgage Terms

You can get an FHA cash-out refinance with a 15-year, 30-year fixed-rate mortgage or as an adjustable-rate mortgage.

Loan-to-Value Ratio

The loan-to-value ratio is the amount of the loan compared to the market value of the home.

For example: If your home is worth $200,000 and the loan has a balance of $100,000, the LTV ratio is 50%.

An FHA cash-out refinance will let you borrow up to 85% of your home’s market value.

Credit Requirements

The FHA home loan allows for the lowest credit scores of all types of mortgage programs available. With just a 500 FICO score, a borrower could qualify with a 10% down payment.

However, lenders set their own credit requirements, and many will require at least a 580-600 credit score for FHA. The same will apply for cash-out refinancing; you will typically need a 580-600 credit score.

The Downside of FHA Cash-Out Refinancing

Mortgage Insurance

FHA mortgage insurance premiums are the main drawback of getting an FHA cash-out refinance. FHA loans require a mortgage insurance premium of .80% of the loan amount annually. While conventional loans don’t require any mortgage insurance with an LTV ratio of 80% or lower, FHA loans require MIP regardless of the LTV ratio.

Ideally, if you have an FHA loan with an LTV ratio of less than 80% you would refinance out of FHA and into a conventional loan to be able to remove mortgage insurance.

Upfront Mortgage Insurance

In addition to the annual mortgage insurance premium, FHA loans also require an upfront MIP payment of 1.75% of the loan amount.

Frequently Asked Questions

How soon can you refinance out of an FHA loan?

You must wait 12 months from the date of closing on your FHA loan before you are eligible for an FHA cash-out refinance loan.

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

The maximum LTV ratio for an FHA cash-out refinance loan is 80%. FHA  changed the max LTV ratio from 85% to 80% in 2019.

What credit score is needed for an FHA cash-out refinance?

Technically, you could be eligible for an FHA cash-out refinance with a 500 credit score. However, most lenders require at least a 580-620 credit score.

The Bottom Line…

If you need cash to renovate or make repairs to your home or for anything else, then an FHA cash-out refinance is a great option.

Use your home equity to get the money you need.

See if you qualify today.