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FHA Cash Out Refinance Program
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FHA Cash Out Refinance Program

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience
FHA Cash Out Mortgage Program Overview

The FHA cash out refinance program enables borrowers to access the equity in their homes with an FHA loan.  FHA cash out refinance guidelines permit a loan-to-value (LTV) ratio of up to 80%, which is the sames as the LTV ratio for a conventional mortgage for a single family property but higher than the LTV ratio usually allowed for a multi-family property with up to four units.  Permitting a higher maximum LTV ratio for multi-unit properties enables borrowers to access more equity, which means you can take out more cash when you refinance.

Another advantage of an FHA cash out refinance is that it requires a lower minimum borrower credit score than most other mortgage programs so more borrowers, including credit-challenged applicants, can qualify for the program. Please note that the program can be used to refinance any type of existing mortgage and not just an FHA loan.

Borrowers can use the proceeds from an FHA cash out refinance for any number of purposes including to pay off debt, home renovations or personal uses such as paying school tuition.  For example, if your home is valued at $200,000 and you have a $100,000 mortgage balance, you could do a $150,000 FHA cash out refinance to pay off your existing mortgage balance and use the remaining loan proceeds after closing costs for home upgrades or to pay off credit card debt with a high interest rate.  If closing costs in this example are $4,000, that would enable the borrower to take out $46,000 in proceeds.

The main negative of an FHA cash out refinance is that it requires borrowers to pay an upfront and ongoing annual FHA Mortgage Insurance Premium (MIP), like a standard FHA loan. MIP is an additional upfront and recurring monthly cost for borrowers but the ability to take significant cash out of your home provides significant benefits for many borrowers.

Important FHA Cash Out Refinance Considerations
Pros
  • More flexible qualification requirements than other cash out refinance programs (lower borrower credit score)
  • Higher maximum loan-to-value (LTV) ratio for multi-family properties than conventional cash out refinance programs
  • Potentially lower FHA mortgage rates
  • No borrower income limits
Cons
  • Borrower is required to pay upfront and ongoing FHA mortgage insurance premium (MIP)
  • No non-occupant co-borrowers permitted
  • Borrowers must be current on their mortgage with no late payments over the prior twelve months
  • FHA loan limits
  • Must own property being financed for a minimum of six months
How an FHA Cash Out Refinance Works

Although the FHA determines the program guidelines, borrowers apply for the program through FHA-approved lenders such as banks, mortgage banks, mortgage brokers and credit unions. These approved lenders make sure that borrowers meet FHA cash out guidelines and qualification requirements.

The table below compares interest rates and fees for FHA lenders in your area.  We recommend that you compare the mortgage terms for an FHA cash out refinance to the terms for other cash out loan programs.  Contact multiple lenders to understand the programs they offer and request mortgage proposals.   Comparing lenders and loan terms enables you to find the mortgage and cash out program that best meets your needs.

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Current FHA Mortgage Rates in San Diego1, California1 as of November 29, 2020
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Data provided by Brown Bag Marketing, Inc. Payments do not include amounts for taxes and insurance premiums. Read through our lender table disclaimer for more on rates and product details.
FHA Cash Out Refinance Guidelines

Borrowers must meet certain requirements to qualify for an FHA cash out refinance loan. The qualification guidelines for the program are similar to the requirements for a standard FHA mortgage; however, there are some differences.  We review the key program qualification guidelines  and program eligibility requirements below.

Maximum Loan-to-Value (LTV) Ratio

The maximum loan-to-value (LTV) ratio for an FHA cash out refinance is 80%. The LTV ratio represents the total amount of debt on a property divided by the value of the property being financed. For example, if you are taking out an $80,000 mortgage on a property valued at $100,000, the LTV ratio is 80% ($80,000 / $100,000 = 80%). Although the maximum LTV ratio for an FHA cash our refinance is lower than the LTV ratio permitted for a standard FHA loan (96.5%), it is consistent with the LTV ratio for many other cash out refinance programs for a one unit property such as a home, condominium or co-op.  Additionally, the 80% LTV ratio also applies to owner occupied two-to-four unit properties, which is higher than conventional loan guidelines for multi-unit properties. 

Please note that if you have a home equity loan or HELOC on a property and that loan remains in place after you refinance, then the loan is counted as debt when you calculate the LTV ratio. Additionally, according to program guidelines, if you have owned your home for between six and twelve months, the LTV ratio is calculated as the lower of 80% of: 1) the property purchase price; or, 2) the the current appraised property value.  Borrowers who have owned their home for less than six months are not eligible for an FHA cash out refinance.

Credit Score

The minimum credit score required to qualify for an FHA cash out refinance is 500 for most applicants, which is lower than the score required by most conventional cash out refinance mortgage programs.  This is why an FHA cash out refinance can be especially helpful for borrowers dealing with credit challenges.  We recommend that you review your credit score six months to a year before you start the mortgage process to address potential issues.  Please note that some lenders may apply their own minimum credit score requirement that is higher than program guideline so be sure to check with your lender to determine their qualification requirements.

Payment History

Borrowers must be current on their mortgage and have paid their mortgage on time for the twelve months prior to submitting their loan application.  Borrowers who are delinquent on their mortgage or who have a late payment within the prior twelve months are not eligible for an FHA cash out refinance.  Borrowers who have owned their home for six-to-twelve months must have made all of their payments on time to be eligible for the program.

Borrower Debt-to-Income Ratio

Lenders typically use a debt-to-income ratio of 43% to determine what size FHA cash out refinance loan borrowers can afford, although it is possible to qualify for an FHA loan with a debt-to-income ratio of 50% or higher under certain circumstances . The debt-to-income ratio represents the maximum percentage of a borrower's monthly gross income that can be spent on total monthly housing expense plus other monthly debt payments such as credit card, auto and student loans. Total monthly housing expense includes your mortgage payment, property taxes, homeowners insurance, FHA mortgage insurance premium (MIP) as well as other potentially applicable expenses such as homeowners association (HOA) fees.

The higher the debt-to-income ratio applied by the lender, the larger the mortgage you qualify for. Circumstances under which it is possible to get approved for an FHA cash out refinance with a debt-to-income ratio of 50% or higher include borrowers with excellent credit scores or job histories, borrowers making larger down payments and borrowers with supplemental sources of income that may not be reflected on their mortgage application, such as from a spouse or part-time work.

Borrower Income Limit

The program does not apply borrower income limits.

Borrower Financial Reserves Requirement

The FHA  cash out refinance program does not require borrowers to hold savings in reserve at mortgage closing for one or two unit properties, although FREEandCLEAR recommends that you hold enough savings in reserve to cover three-to-six months of total monthly housing expense. For three or four unit properties borrowers are required to hold three months of total monthly housing expense (mortgage payment plus property tax, homeowners insurance and FHA MIP) as savings in reserve at mortgage closing. So if your total monthly housing expense is $1,500, you would be required to keep at least $4,500 in reserves at the time the mortgage closes.

Borrower Employment History Requirement

Borrowers are typically required to have two years of continuous employment history to be eligible for an FHA cash out refinance.  Exceptions to the two year work history requirement may be made for borrowers who were in the military or who recently graduated from college or graduate school as both military service and full-time education typically count as employment history when you apply for a mortgage. Explainable employment gaps such as seasonal jobs or situations where the borrower has returned to their job after an extended absence may be permitted under certain circumstances.

Co-Borrowers

Non-occupant co-borrowers or co-signers are not permitted according to program guidelines.  This means that all borrowers must reside in the property being financed.  For example, a parent cannot so-sign the mortgage for a child unless they all live in the home being mortgaged.

Use our personalized mortgage quote feature to compare FHA loan proposals from leading lenders.  Our quote form is free, is easy-to-use, and requires minimal personal information.  Shopping for your mortgage is the best way to save money on an FHA cash out refinance.

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Program Costs and Fees

Mortgage Rate

The mortgage rate for an FHA cash out refinance is usually higher than the interest rate on a standard FHA loan but lower than the rate for a conventional cash out refinance loan. The rate is lower because the program is backed by the government and borrowers are required to pay mortgage insurance premium. Additionally, FHA mortgage rates should be consistent regardless of your credit score, which makes the program appealing to applicants with less than perfect credit.  Borrowers should shop multiple lenders to find the FHA cash out refinance with the lowest mortgage rate and closing costs.

Closing Costs and Extra Fees

The FHA cash out refinance program charges standard closing costs and fees. Additionally, aside from the upfront and monthly mortgage insurance premium, borrower are not required to pay extra costs to participate in the program. According to program guidelines, borrowers can pay for closing costs out-of-pocket or by paying a higher mortgage rate.

Impound Account

Along with their mortgage payment, the program requires borrowers to pay property tax, homeowners insurance and FHA mortgage insurance premium (MIP) into an impound account on a monthly basis. An impound account is a trust account controlled by the lender from which expenses such as taxes and insurance are paid when due. The impound account does not affect the amount of fees the borrower is required to pay for the mortgage.

Use the FREEandCLEAR Lender Directory to find top-rated lenders near you that offer FHA loans and other cash out refinance programs.

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FHA Cash Out Refinance Mortgage Insurance Premium (MIP)

The FHA cash out refinance program requires that borrowers pay an upfront and ongoing monthly mortgage insurance premium (MIP).  The MIP protects lenders against losses that result from defaults on FHA loans. The upfront MIP for most FHA loans is 1.75% of the loan amount and can be added to the mortgage amount.  The ongoing MIP is similar to private mortgage insurance (PMI) and is an additional monthly cost to the borrower on top of your mortgage payment.  The ongoing monthly MIP fee depends on mortgage amount, loan-to-value (LTV) ratio and mortgage length with the shorter the mortgage term and lower the LTV ratio, the lower the MIP fee.

Borrowers who are refinancing an existing FHA loan may be able to receive a partial refund of the upfront MIP they originally paid if they refinance with an FHA cash out refinance loan within three years.  Any refund is applied to the upfront MIP for their new loan. The upfront MIP refund diminishes over the course of the three years with borrowers eligible to receive a 10% refund if they refinance in the 36th month after closing.

Mortgage Type and Loan Amount

Mortgage Program

Only 15 and 30 year fixed rate mortgages and 1 year, 3/1, 5/1, 7/1 and 10/1 adjustable rate mortgages (ARMs) are eligible for the program while interest only mortgages are not eligible.

Loan Limits

There are limits to the size of mortgage you can obtain through the program. There is one set of loan limits for the 48 contiguous states, the District of Columbia and Puerto Rico and a higher set of loan limits for Alaska, Hawaii, Guam and the U.S. Virgin Islands. For the 48 contiguous states, the District of Columbia and Puerto Rico the FHA loan limits for a single unit property range from $331,760 to $765,600 in high cost areas and the four unit limits range from $638,100 to $1,472,550.

Property Eligibility

The FHA cash out refinance program only applies to owner-occupied one-to-four properties such as homes, condominiums and co-ops. Investment properties are not eligible for the program.  Properties owned free and clear are eligible for the program.

Related FREEandCLEAR Resources


Sources

"II.A.8.d.v. Cash-Out Refinances."  FHA Single Family Housing Policy Handbook 4000.1.  Federal Housing Administration, January 2 2020.  Web.

"HUD Announces Agency Efforts To Reduce Risk From Cash-Out Refinance Lending."  HUD No. 19-114.  U.S. Department of Housing and Urban Development, August 1 2019.  Web.

About the author
Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR.  Harry is a licensed mortgage professional (NMLS #236752). More about Harry

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