FHA Cash-Out Refinance: Guidelines to Follow and How It Works

Published May 26, 2022

A cash-out refinance can be an excellent option for homeowners who have built up some equity in their property and want access to cash. If you have an FHA mortgage, one your easiest options is to refinance to a new FHA loan. Qualifying for an FHA cash-out refinance is very similar to qualifying for your original FHA mortgage, so most homeowners find the process to be fairly straightforward. Here is everything you need to know about an FHA cash-out refi.

What is an FHA cash-out refinance?

An FHA cash-out refinance is a new home loan that pays off your original mortgage balance and replaces the debt. In addition to replacing your original mortgage, the new FHA loan provides you with a cash payment. Your new mortgage balance will be larger than your previous balance, but you receive the difference in cash.

Homeowners opt for cash-out refinances for a variety of reasons. You could use the funds from the refinance to complete a major repair or renovation. Some may need the cash to pay for tuition or a medical bill. Because FHA cash-out refinance rates are typically lower than rates for personal loans or other forms of debt, a cash-out refinance can be a cost-effective way to access cash. 

Who qualifies for an FHA cash-out refinance?

The requirements for approval for an FHA cash-out refinance are similar to the requirements for your original FHA loan. However, you may need to meet some additional qualifications.

The minimum credit score requirement for an FHA cash-out refinance is 580, but you'll get a more favorable interest rate with a higher score. You'll also need to show proof of consistent employment and income. In most cases, the maximum debt-to-income ratio the FHA allows is 43%, which means no more than 43% of your income should go toward your housing payments and other debts.

You must have lived in the home for at least a year before being approved for a cash-out refinance with the FHA. You most likely will be denied an FHA refinance if you've ever missed a mortgage payment.

The last key factor in your approval is your loan-to-value ratio, which compares the balance of your mortgage to the value of your home. Your loan-to-value ratio cannot be more than 80%, so you must have at least 20% equity in your home to qualify for a cash-out refinance.

2022 FHA cash-out refinance limits

Certain requirements and terms for FHA loans change each year, so it's important to look for up-to-date information as you prepare your application. Your new mortgage can amount to up to 80% of your home's appraised value, so mortgage limits vary from homeowner to homeowner.

However, the FHA does set a maximum loan value for all borrowers. In most locations, the limit for single-family homes is $420,680. In high cost-of-living areas, though, the limit for single-family homes is $970,800. You can use the Department of Housing and Urban Development's website to search for FHA mortgage limits in your area.

The FHA also sets limits for multi-family properties. In 2022, mortgage limits for duplexes are set to $538,650 in low cost-of-living areas and $1,243,050 for high cost-of-living areas. The limits for triplexes and four-plexes are slightly higher. 

Pros and cons of an FHA cash-out refinance

Refinancing your home is a major financial decision. You should weigh the pros and cons before completing your application. The key benefit to a cash-out refi is the influx of cash you'll receive once the mortgage is finalized. Homeowners who have a significant amount of equity in their home can get a sizable cash payment at a competitive interest rate.

FHA cash-out refinance rates are typically much lower than rates for personal loans and credit cards. They’re also often lower than interest rates for home equity loans. If you need access to cash, a cash-out refinance may be the most affordable loan option.

One major downside to any form of refinancing is that you must pay closing costs out-of-pocket or roll them into the new mortgage balance. Closing costs can amount to thousands of dollars, so you should be certain that the savings and the cash payment are worth the additional expense.

With an FHA cash-out refi, you're also borrowing more than you currently owe. While you can put the cash to good use, you do have to repay it with interest. Increasing the balance of your mortgage by a substantial amount can increase your monthly payment or extend the lifespan of the loan. 

How to apply for an FHA cash-out refinance

If you meet the requirements for a cash-out refinance, you can submit your application for the FHA loan. Applying for refinancing is similar to applying for your first mortgage. You'll collect all of the documents that prove your income, debts, and assets, and you'll undergo a credit check with your lender. You should also prepare to show your lender a recent mortgage statement that proves you've made consistent payments on your home for the last year.

Some types of FHA refinancing do not require an appraisal, but you will need an appraisal for a cash-out refi. Your lender will use the appraised value of the home to determine how much cash you can receive from the deal.

Once your application has been approved and your appraisal has been completed, you and your lender can close on your new mortgage. You should expect your closing costs to amount to 2% to 5% of the loan, and you can either pay this expense up-front or add it to your mortgage balance.

An FHA cash-out refinance could be a great way for you to tap into your home's equity while also securing a lower interest rate on your mortgage. There are always pros and cons to refinancing, though, so you should speak with an expert to determine whether or not this is the right option for you. Schedule an appointment with one of our mortgage specialists to learn about how you can benefit from an FHA cash-out refinance. As long as you approach you refinance carefully, you should be satisfied with the results.