FHA Cash-Out Refinance Guide for 2024

What is an FHA cash-out refinance?

An FHA cash-out refinance is a type of mortgage refinance loan backed by the Federal Housing Administration. It pays off the remaining balance on your existing home loan, if you have one, and lets you borrow additional funds against your equity. You receive those funds as cash.

You can use cash-out refinancing to complete home improvements and repairs, consolidate debt, or cover the cost of other financial obligations, according to Stan Reinford, a mortgage loan originator at Movement Mortgage. 

You can use FHA refinance loans to refinance FHA or conventional mortgages.

Who is an FHA cash-out refinance loan best for?

FHA cash-out refinance loans are an appealing option for borrowers with modest credit scores and higher levels of existing debt. 

“This loan is definitely more helpful for people who can't qualify for other cash loans where they need access to the equity in their home,” Reinford says.

FHA cash-out refinance requirements

The FHA sets eligibility requirements for both buyers and properties:

• Property use: FHA cash-out refinance loans can only refinance a mortgage on your primary residence. Second homes and investment properties are ineligible.
• Residency requirements: The home you’re financing must have been your primary residence for at least the past 12 months. The residency requirement might be waived if you inherited the property.
• On-time mortgage payments: If you currently have a mortgage on the property, you must have paid your most recent 12 months’ payments during the month they were due.
• Credit score: The minimum credit score for all FHA loans is 500. Some lenders set higher minimums on loans they originate.
• Debt-to-income ratio (DTI): The FHA allows a maximum DTI of 43% in most cases. You could qualify with a DTI of up to 50% if your credit score is 580 or higher and you meet additional requirements, such as cash reserves and significant income, among other factors.
• Loan-to-value ratio (LTV): The maximum LTV allowed for an FHA cash-out refinance loan is 80%.

How much can you borrow with an FHA cash-out refinance?

FHA cash-out refinance loan limits have two components: the nationwide mortgage limit and the maximum LTV.

The nationwide mortgage limit that applies to your home depends on where the home is located. The standard limit for 2024, which covers most areas in the 48 contiguous states, is $498,257 for a single-family home. 

The limit for single-family homes in HUD-designated “high-cost areas” is $1,149,825. Homes in “special exception areas,” such as Alaska, Hawaii, Guam, and the U.S. Virgin Islands, can qualify for up to $1,724,725 in financing.

The second component, the LTV, refers to the percentage of the home’s value you can borrow. 

“Homeowners can borrow up to 80% of the value of their home with an FHA cash-out refinance,” Reinford says. 

You can multiply your home’s value by 0.80 to estimate the maximum LTV you’d be eligible for. Keep in mind that LTV applies to the entire loan, including the portion that pays off any existing loans and the cash you draw from the equity.

FHA cash-out refinance vs. conventional cash-out refinance

FHA and conventional loans have different entities that set rules for each. 

Since FHA cash-out refinance loans are insured by a government agency, they adhere to that agency’s lending standards. Conventional cash-out refinance loans have no government backing, so the standards may vary by lender. However, most conventional loans can be purchased by Freddie Mac or Fannie Mae, private companies that operate under government supervision and regulation. These entities set minimum standards for the conventional loans they purchase. Loans that conform to those standards are called conforming loans.

Types of properties you can refinance

Conventional refinance loans are more flexible in several ways, including the type of property you can refinance.

“FHA loans are for primary residences only and conventional loans are for primary residences, second homes, and investment properties,” Reinford says.

Loan limits

Conventional loan maximums follow national conforming loan limits. The current conforming limit is $766,550. 

The FHA limit for low-cost areas is 65% of the conforming limit, or $498,257 for a one-family home.

In high-cost areas, the FHA loan limit increases to 150% of the national conforming limit. The FHA maximum for these areas is $1,149,825. The FHA makes further adjustments for special exception areas, where the current limit is $1,724,725.

Residency requirements

At least one FHA cash-out refinance borrower for a particular loan must have owned the home and lived in it as their primary home for 12 months or longer. 

For conventional cash-out refinances, a first mortgage being refinanced must be at least 12 months old, and at least one of the borrowers must have lived in the home as their primary residence for at least six months.

Both loan types allow exceptions for situations such as inherited properties and properties acquired in a divorce.

Credit requirements

Conventional cash-out refinance loans require a 620 credit score. FHA borrowers, on the other hand, can qualify with a score as low as 500, although the lender that originates the loan might require higher scores.

Maximum loan-to-value ratio

The maximum LTV for conventional cash-out refi loans is 80% for a single-family primary residence. The maximum drops to 75% for primary residences with two to four units and second homes. 

The FHA cash-out LTV is 80%.

Maximum debt-to-income ratio

The maximum DTI for FHA cash-out refinance loans is 43% in most cases, but it can be as high as 50% if your credit score is at least 580 and you have a compensating factor such as significant cash reserves. 

Conventional cash-out refinance loans have a standard DTI maximum of 45%. You might be eligible with a higher DTI if you meet additional requirements, such as having at least six months’ worth of cash reserves. 

Mortgage insurance

Most FHA loans, including cash-out refinance loans, require a mortgage insurance premium (MIP). The upfront MIP costs 1.75% of the loan amount. In addition, you’ll pay an annual premium of 0.11% to 0.50%, depending on your LTV. FHA mortgage insurance premiums last for the life of the loan unless your LTV is 90% or higher, in which case you can remove it after 11 years.

Conventional loans typically require private mortgage insurance if the LTV is higher than 80%. The cost varies by insurer, based on factors like loan amount and credit score. 

Pros and cons of an FHA cash-out refinance

An FHA cash-out refinance loan can get you the cash you need for a major expense, and it might even result in a more favorable mortgage rate or loan term. But the loans have pros and cons:

How to apply for an FHA cash-out refinance loan

The process for applying for an FHA cash-out refinance is similar to applying for a purchase loan, but in this case, you’ll already have equity: 

• Estimate your equity to determine whether you have enough to qualify. To do that, subtract your mortgage loan balance from your home’s value.
• Research lenders to find a few that are approved to issue FHA-backed loans.
• Request quotes so you can compare the lenders and their rates.
• Gather income documentation, such as two years’ worth of W2 forms, 1099s, and tax returns, in addition to recent pay stubs and bank statements.
• Apply for your loan online, by phone, or in person.
• Submit any requested documents, such as homeowners insurance policies, proof of assets and liabilities, and information about your current mortgage.