What is an FHA cash-out refinance?

This type of FHA home loan gets you cash back at closing

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An FHA cash-out refinance lets homeowners trade out their current mortgage for a new one and get cash back at closing, but only if they have enough home equity and meet the loan requirements set by the Federal Housing Administration (FHA). This type of loan is popular for homeowners who need funding for home remodeling projects, major expenses or debt consolidation but don't want to sell their homes and move.

If you have considerable equity in your home and you're willing to trade your existing mortgage for a new one from the FHA, you may want to look into this type of refinance loan.


Key insights

An FHA cash-out refinance works similarly to other cash-out refinance loans in that you replace your existing loan for a new, higher mortgage.

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Your old mortgage gets paid off during the FHA cash-out refinance process, and you begin repaying your new home loan based on new terms while getting cash back at closing.

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FHA loans are available for individuals with imperfect credit, and they come with competitive interest rates and low closing costs.

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A major downside of refinancing with the FHA is that you'll pay both upfront and annual mortgage insurance payments, even if you have considerable home equity built up.

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Understanding an FHA cash-out refinance

An FHA cash-out refinance lets you trade out your existing home loan for a new one from the FHA. However, the new home loan will be higher since you are getting cash back at closing.

Getting a new home loan can also mean paying a different interest rate than you were paying on your previous mortgage. Consequently, an FHA cash-out refinance can cost you more in the long run if your old home loan had a lower rate, or less if refinancing gets you a lower rate than you have now.

While there are myriad reasons to access home equity with a cash-out refinance loan, many consumers use the cash back they get at closing for:

  • Major home upgrades or repairs
  • Debt consolidation
  • Higher education expenses
  • Unexpected bills or expenses

» MORE: How to refinance a mortgage in 2024

FHA cash-out vs conventional cash-out refinance

If you have considerable home equity to access and you're thinking of refinancing, you can consider a conventional cash-out refinance or one from the FHA. Both let you get cash back at closing and trade out your current mortgage for a new one.

However, there are some differences between the two:

  • Conventional cash-out refinance: A conventional cash-out refinance loan has stricter credit score requirements (credit score of 620), and you can typically borrow up to 80% of your home's value in total. This threshold prevents you from paying private mortgage insurance (PMI) on the new loan.
  • FHA cash-out refinance: While these loans can be available to borrowers with credit scores as low as 500, some individual lenders may have higher minimum score requirements of 550 or 580. FHA loans also require both upfront and annual FHA mortgage insurance.

How does an FHA cash-out refinance work?

The steps that take place during an FHA cash-out refinance are similar to those with other cash-out refinance loans:

  1. Determine how much home equity you have.
  2. Shop around among FHA-approved lenders that offer cash-out refinancing.
  3. Fill out a loan application with your chosen mortgage lender.
  4. Provide proof of your identity, income and current credit rating.
  5. Lock in your interest rate with the lender.
  6. Have your home appraised through the Federal Housing Administration (FHA).
  7. Finalize the details of your FHA cash-out refinance, and read over the closing disclosure to understand your closing costs and how much cash you'll get back.
  8. Close on your new mortgage and get cash back.

How much does it cost to get an FHA cash-out refinance?

According to mortgage industry veteran Casey Fleming, author of “Buying and Financing Your New Home,” the costs you'll pay for an FHA cash-out refinance aren't standard across the board. "Costs vary widely by region and lender, but the cost is generally about the same as a conventional loan," said Fleming.

It's important to remember that FHA loans require both upfront and annual mortgage premiums. The upfront portion of the FHA mortgage premium equals 1.75% of the loan amount, and this is paid as part of the closing costs for any FHA loan.

What do you need to get an FHA cash-out refinance?

FHA cash-out refinances are easier to qualify for than conventional cash-out refinancing. If you're considering this type of home loan, you'll need to be aware of the criteria you must meet:

  • Credit score requirements apply. The official minimum credit score requirement for FHA loans is 500, although many lenders have stricter minimum requirements of 550, 580 or higher for these loans.
  • FHA loan limits apply. FHA loan limits for most of the country are set at $498,257 in 2024, whereas limits come in at a higher amount of $1,149,825 in certain regions with a high cost of living.
  • Loan-to-value maximums apply. An FHA cash-out refinance lets borrowers have a maximum 85% loan-to-value (LTV) ratio. This means it's possible to borrow up to 85% of a home's value in total. For example, a borrower with a home that's worth $400,000 may be able to qualify for a new mortgage of up to $340,000.
  • You must live in the home. FHA cash-out refinance transactions are only applicable for owner-occupied properties in which the borrower has resided in the home as their primary residence for at least 12 months prior (if they owned the home for at least one year).
  • You must have made mortgage payments on time. Properties with an existing mortgage must show at least six months of on-time payments on the home loan at a minimum, or 12 months of on-time payments if the borrower owned and lived in the home a full year before refinancing (whichever is less).

» LEARN: How soon can you refinance a mortgage?

Pros and cons of FHA cash-out refinance

If you're considering an FHA cash-out refinance, some of the potential pros and cons depend on the specifics of your current mortgage. For example, your new FHA home loan may have a higher or lower interest rate than your current loan.

Here's a rundown of some additional advantages and disadvantages that come with this type of cash-out refinance loan.

Pros

  • Access home equity when you need it. If most of your wealth is tied up in your home's value but what you really need is cash, this type of cash-out refinance can help you access your money.
  • Easy credit qualifications: Credit requirements for an FHA cash-out refinance are lower than those for a conventional cash-out refinance.
  • You can use the funds however you want. You can use the cash you access for home improvements, a once-in-a-lifetime vacation, debt consolidation or any other purpose.

Cons

  • These loans only work for a primary residence. You can use these loans for a primary residence, but not for a second home or an investment property.
  • You'll pay upfront and ongoing mortgage insurance. Fleming says the fact FHA loans require both upfront and annual mortgage insurance premiums is the biggest downside of this type of cash-out refinance.
  • You'll reduce the amount of equity you have. Cashing out your home equity means you no longer have that cushion in your financial life.

View rates from leading lenders now.

    FAQ

    How long does it take to get an FHA cash-out refinance?

    You can apply for an FHA cash-out refinance after as little as six months of homeownership. However, those who have owned their home for at least one year can apply after that timeline if they can show they have made 12 on-time payments on their home loan.

    Still, you can only borrow up to 85% of your home's value with an FHA cash-out refinance. This means you may need to wait longer to have enough equity for this type of home loan to make sense.

    What are alternatives to an FHA cash-out refinance?

    Common alternatives to an FHA cash-out refinance include a conventional cash-out refinance, home equity loans and home equity lines of credit (HELOCs).

    Are there restrictions on what I can do with an FHA cash-out refinance?

    When you access equity in your home through an FHA cash-out refinance, you can use the cash back you get at closing for any purpose.

    Bottom line

    An FHA cash-out refinance lets homeowners tap into their home equity and get cash back at closing. Their old mortgage gets paid off in the process and is replaced by a new one for a larger loan amount.

    That said, this type of cash-out refinance can be more expensive since FHA loans come with upfront mortgage insurance and annual mortgage insurance premiums. Interest rates for these loans may also be higher than you'll get with a conventional cash-out refinance.

    If you're curious whether an FHA cash-out refinance is best for you, or if you might be better off accessing your home equity through a different method, speaking with a qualified mortgage expert is probably your best bet.


    Article sources
    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. U.S. Department of Housing and Urban Development, "Let FHA Loans Help You." Accessed March 24, 2024.
    2. Freedom Mortgage, "Maximum LTV for cash out refinance." Accessed March 24, 2024.
    3. Freedom Mortgage, "Cash out refinance credit scores." Accessed March 24, 2024.
    4. U.S. Department of Housing and Urban Development, "Minimum Credit Scores and Loan-to-Value Ratios." Accessed March 24, 2024
    5. U.S. Department of Housing and Urban Development, "APPENDIX 1.0 – MORTGAGE INSURANCE PREMIUMS." Accessed March 24, 2024.
    6. U.S. Department of Housing and Urban Development, "Maximum Mortgage Limits 2024." Accessed March 24, 2024.
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