FHA Cash Out Refinance Pros and Cons
The program offers borrowers multiple benefits including the ability to refinance with a higher maximum loan-to-value (LTV) ratio which enables them to take more cash out of their homes, lower FHA mortgage rates and more flexible borrower qualification guidelines. Program negatives include the added cost of FHA mortgage insurance premium (MIP), loan limits and that borrowers must be current on their mortgage.
We review the full list of the pros and cons for an FHA cash out refinance mortgage below. Borrowers should understand both the positives and negatives of an FHA cash out refinance to determine if it is the right mortgage refinance program for them.
FHA Cash Out Refinance Pros
No Property Location Restrictions
Some mortgage programs require that the property being financed is located in a specific geographic area to qualify for the program. The FHA Cash Out Refinance Program, however, does not have a property location restriction, making it simpler to use. One-to-four unit owner-occupied properties located anywhere in the United States are eligible for the program.
Higher Loan-to-Value (LTV) Ratio for Multi-Family Properties than other Cash Out Refinance Programs
The FHA Cash Out Refinance Mortgage Program permits a maximum loan-to-value (LTV) ratio of 80% for one-to-four unit owner occupied properties. The LTV ratio represents the total amount of loans on a property, including the mortgage, divided by the fair market value of the property. The maximum LTV ratio for an FHA cash out refinance for a single unit property is the same as conventional mortgage guidelines but higher than the LTV ratio typically permitted for multi-unit properties. This potentially enables you to take more cash out when you refinance, depending on your property type.
Potentially Lower Mortgage Rate
The mortgage rate on an FHA loan is typically 0.250% - .750% lower than the interest rate for other cash out refinance programs. The interest rate for an FHA mortgage is lower because the program is backed by the government and borrowers are required to pay a mortgage insurance premium (MIP), which provide additional protection for the lender in the event the borrower cannot pay back the loan. The lower mortgage rate on an FHA cash out refinance loan reduces your monthly mortgage payment and potentially saves you thousands of dollars in total interest expense over the life of the loan.
%
Flexible Borrower Qualification Guidelines
The FHA Cash Out Refinance Mortgage Program uses more flexible borrower qualification requirements including a lower minimum required credit score and a potentially higher debt-to-income ratio. The minimum credit score required to qualify for an FHA cash out refinance is 500 for most borrowers, which is lower than most conventional cash out refinance programs. Additionally, although the standard debt-to-income ratio limit for the program is 43%, applicants with stronger financial and credit profiles may be able to qualify 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 (mortgage payment plus taxes and insurance) plus other monthly debt such as credit card, student and auto loans. The higher the debt-to-income ratio, the larger the mortgage you can qualify for.
No Borrower Income Limit
The program does not limit how much money a borrower can earn. Several other mortgage assistance programs use a maximum income limit to determine borrower eligibility. By not using a borrower income limit, FHA cash out refinance loans are available to more potential home buyers.
FHA Cash Out Refinance Cons
Added Cost of FHA Mortgage Insurance Premium (MIP)
FHA Cash Out Refinance Program participants are required to pay an up-front and ongoing monthly FHA mortgage insurance premium (MIP). FHA MIP pays for insurance that protects lenders in the event that borrowers default on their mortgage. Although it can be added to the mortgage amount, the up-front fee increases your closing costs while the ongoing monthly MIP increases your total monthly housing expense. The up-front MIP for most mortgages is 1.75% of the loan amount while the ongoing fee depends on the loan amount, LTV ratio and mortgage term. Borrowers should understand how MIP impacts their upfront and ongoing monthly costs before selecting an FHA cash out mortgage.
FHA Loan Limits
There are limits on the size of loan you can obtain through the FHA Cash Out Refinance Program. FHA loan limits vary by county and by the number of units in the property being financed. In the contiguous U.S., FHA loan limits for a single unit property such as a home or condominium range from $472,030 to $1,089,300 for high cost areas and the limit for a four unit property ranges from $907,900 to $2,095,200. In Alaska, Hawaii, Guam and the U.S. Virgin Islands loan limits range from $1,633,950 for a single unit property to $3,142,800 for a four unit property. Borrowers who live in more expensive areas of the country may find that the FHA mortgage limits restrict refinance options.
Borrowers Must Be Current on Their Motgage
According to FHA Cash Out Refinance Program guidelines, borrowers are required to be current on their mortgage and must have paid their mortgage on-time for the twelve months prior to applying for the loan. Borrowers who are behind on their mortgage or who have a late payment within the previous twelve months are not eligible for the program.
Must Own Property for a Certain Period of Time
The FHA Cash Out Refinance Program requires that borrowers have owned the property being financed for at least six months. Borrowers that have owned their home for less than six months are not eligible.
Non-Occupant Co-Borrowers Are Not Allowed
FHA Cash Out Refinance program guidelines require that all borrowers reside in the property being financed. Non-occupant co-borrowers or co-signers are not allowed according to program rules. For example, a parent cannot co-sign the mortgage for a child unless they all live in the property being financed.
More FREEandCLEAR Resources
FHA Cash Out Refinance Guide
Review our in-depth overview of the FHA Cash Out Refinance Mortgage Program including borrower eligibility guidelines and other important program information such as property requirements and mortgage limits.
FHA Mortgage Rates
FHA cash-out refinance mortgage are provided by traditional lenders such as banks, mortgage banks, mortgage brokers and credit unions. Use our FHA mortgage rate table to review updated FHA mortgage rates and fees for lenders in your area. Comparing rates from multiple lenders is the best way to save money on your FHA loan.
Mortgage Refinance Guide
Our Mortgage Refinance Guide walks you through the refinance process step-by-step and includes valuable information, resources and tips.
Cash Out Refinance Calculator
Use our Cash Out Refinance Calculator to determine how much equity you can take out of your home and how much money you can save by refinancing.
Sources
"II.A.8.d.v. Cash-Out Refinances." FHA Single Family Housing Policy Handbook 4000.1. Federal Housing Administration, January 2 2020. Web.