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With most mortgages lasting up to 30 years, many borrowers may consider refinancing to ensure they are receiving the best terms throughout the life of the loan. The FHA cash-out refinance is a relatively simple option that allows borrowers to get the cash needed for debt consolidation, home improvements or other large expenses.

Borrowers should explore the FHA cash-out refinance guidelines to assess their qualifications for this low-interest financing option.

​What is an FHA Cash-Out Refinance?

An FHA cash-out refinance allows homeowners to leverage equity they’ve built up in their home to extract cash. With help from an FHA-backed lender, homeowners can use this financing option to borrow more than is currently owed on their mortgage and “cash-out” the difference after closing on the new loan.

How FHA Cash-Out Refinances Work

The process for securing an FHA cash-out refinance is similar to that of any other mortgage or refinance loan. It’s usually a good idea to make sure your credit history and other qualifying requirements are in place before applying, to minimize any hiccups during the underwriting process.

Once you are ready to apply, your cash-out refinance will go through the following stages:

  1. Initial Application: To start the process, you’ll choose a lender and complete their required application, which includes personal details, proof of income, permission to check your credit and a myriad of other questions.
  2. Qualification Review: Your lender will prepare a preliminary analysis of your loan terms based on your creditworthiness, the equity available in your current mortgage and your qualifying interest rates. You will evaluate the loan terms and determine if you would like to move forward with the cash-out refinance process.
  3. Underwriting: During this stage, your lender will thoroughly review your submitted documentation, ask for any missing documentation or additional required explanatory documents, and prepare your loan for closing.
  4. Closing: To finalize your loan and receive your cash, you’ll need to sign the paperwork for your new mortgage terms and pay any associated closing costs. In some cases, the closing costs can be rolled into the new loan or taken out of the cash you receive. Keep in mind that those options can also come with higher interest rates.
  5. Waiting Period: For most traditional mortgages or refinances, the process would end at closing. But with a cash-out refinance, the lender must provide a three-day waiting period that allows you to change your mind and back out of the deal. If you decide to back out during this waiting period, your existing mortgage will stay in force and you won’t pull any equity out of your home.
  6. Cash-Out: After the three-day waiting period has ended, the lender will process your cash-out and issue you a check or deposit the funds directly into your account.

Uses For an FHA Cash-Out Refinance

Funds from a cash-out refinance can be used for any purpose. As long as you meet the FHA requirements to qualify for the loan, the FHA will not limit how you use your money.

However, some uses make better financial sense than others. Generally, some financially sound reasons to secure a cash-out refinance include:

  • High-interest debt reduction, such as credit cards or auto loans
  • College tuition financing (especially to avoid or refinance student loans)
  • Major home repairs or improvements
  • Funding high-priced, unavoidable expenses, such as extended medical care

FHA Cash-Out Refinance Eligibility Requirements

When applying for an FHA cash-out refinance, your lender will typically require the following minimum criteria:

  • You must use the home as your primary residence
  • You must meet the lender’s minimum equity threshold (typically at least 20% equity remaining after the refinance)
  • You must have lived in the home for at least a year before refinancing
  • You must be current on all payments for your existing FHA mortgage
  • You must have a debt-to-income ratio of less than 50% when considering your new (higher) mortgage payment
  • You must meet the lender’s minimum credit scores

Can I Get an FHA Cash-Out Refinance with Bad Credit?

For a cash-out refinance, the FHA will back loans for borrowers with credit scores as low as 500. But credit score requirements will vary by lender, and most lenders require credit scores of 620 or higher.

FHA Cash-out Refinance Maximum Loan-to-Value (LTV)

The FHA cash-out refinance max LTV ratio is 80%. This means you won’t qualify for an FHA cash-out refinance until you have built up more than 20% equity in your home. As an example, let’s say you currently have $100,000 remaining on your current mortgage for a home valued at $300,000. The FHA maximum LTV of 80% translates to a mortgage up to $240,000 on this property, so obtaining a cash-out refinance could bring up to $140,000 in your pocket.

Pros of FHA Cash-Out Refinances

An FHA cash-out refinance offers the following advantages over other financing alternatives:

Pros Description
Spending flexibility Once you are approved, your lender and the FHA have no say in how you choose to spend the money. Lower credit score requirements: Many lenders have a minimum credit score requirement of 620, while some will approve borrowers with scores as low as 580. Compared to other conventional or non-government-backed loans, these credit scores are more attainable for many borrowers.
Lower credit score requirements Many lenders have a minimum credit score requirement of 620, while some will approve borrowers with scores as low as 580. Compared to other conventional or non-government-backed loans, these credit scores are more attainable for many borrowers.
Lower interest rates A cash-out refinance can be a cost-effective way to acquire cash or refinance your mortgage. Interest rates on FHA loans are typically lower than other mortgage options, and interest rates on an FHA cash-out can be much lower than credit card interest rates, personal loans or even student loan debt.
Debt consolidation By using the funds from your cash-out refinance to pay off high-interest debt, you could save thousands of dollars in interest and even lower your total monthly payments.
Greater access to funds Banks and financial institutions will typically limit the amount of credit offered to you in the form of personal loans or credit cards. By leveraging the equity available in your home, you can often access more cash than would otherwise be available.

Cons of FHA Cash-Out Refinances

As with any financing option, there are some disadvantages to consider before pursuing an FHA cash-out refinance:

Cons Description
Mortgage insurance requirements FHA loans require two types of private mortgage insurance. These are 1.75% of the total loan amount upfront at closing, and 0.55% per year for the life of the loan.
Increasing debt The only way to get equity out of your home is to increase the size of your mortgage and “cash-out” the difference. This means you’ll be borrowing more against your home than you originally owed, increasing your overall debt load and potentially extending the time until your house is paid off.
Closing costs Most mortgages include some closing costs, and an FHA refinance is no different. Even though you are accessing equity in your home, processing a refinance will cost you.
New interest rates Changing your loan terms can be a double-edged sword; while refinancing at a lower interest rate can save you money over the life of the loan, refinancing at a time when interest rates are rising can be quite costly. Review the terms of your loan and compare any changes to your interest rates before signing the final paperwork.

How to Get Started with an FHA Cash-Out Refinance

Be sure to evaluate the FHA cash-out refinance guidelines to determine if it's a good fit. Then review the terms and amount remaining on your current mortgage. This will give you a better idea of whether the current interest rates are likely to work in your favor. You'll also get an approximation of how much equity you currently have in your home.

If an FHA cash-out refinance seems like a viable option, speak to a qualified lender to discuss your situation and options.