What Is FHA Cash-Out Refinance and How Does It Work?

FHA Cash-out refinance also known as cash-out refinance loans are around 42% of all home refinancing in the U.S. Homeowners who refinanced their mortgages saved over $2,700 annually on their mortgage payments. With home prices going up—rising by about 5.8% each year over the last 10 years.

When choosing between a cash-out refinance, a home equity loan, or a HELOC (home equity line of credit) you need to understand their features. This blog will cover, how cash-out refinancing works, its pros and cons, and how it compares to other choices. This will help you pick the best option for your needs.‍

A cash-out refinance lets you use the value, or equity, you’ve built up in your home. You take out a new, larger loan to replace your current mortgage, and the extra amount becomes cash you can use.

For example, if your home is worth $300,000 and you owe $150,000, you have $150,000 in equity. With a cash-out refinance, you might borrow up to 80% of the home’s value, or $240,000. After paying off your $150,000 mortgage, you’d get $90,000 in cash.

The FHA Cash-Out Plan, from the Federal Housing Administration, also allows you to access up to 80% of your home’s equity. It has a minimum credit score of 580 and allows a higher debt ratio of up to 43%, making it easier for people with lower credit to qualify. FHA loans also often have slightly lower interest rates.‍

A cash-out refinance lets you borrow against your home’s value by replacing your current mortgage with a larger one. Here’s how it works:

1. Calculate Your Home EquityFind your equity by subtracting what you owe from your home’s market value.Example: If your home is worth $350,000 and you owe $180,000, your equity is $170,000.
2. Decide on the Cash Amount NeededChoose how much cash you need to borrow. Lenders generally allow up to 80% of your home’s value. For instance, if you need $100,000 for home renovations, a cash-out refinance might work.
3. Compare LendersLook at options from different lenders to find the best rates, fees, and loan terms.
4. Apply and Get ApprovalAfter picking a lender, submit your application. The lender will verify your income, credit, and home value.
5. Close on the New LoanOnce approved, close on the new, larger loan, which will pay off your old mortgage.
6. Receive Your CashAfter paying off the old loan, you get the remaining cash.Example: With a new loan of $280,000, you’d pay off the $180,000 mortgage and get $100,000 in cash.

With an FHA cash-out refinance, you can also borrow more than what you owe and get cash at closing. This option allows easier credit requirements and works even if you don’t already have an FHA loan.‍

To get a cash-out refinance, you need to qualify based on your credit score, finances, and property details—just like when someone buys a home with a new mortgage.

Here’s what you’ll usually need:

1. Over 20% Equity in Your HomeYou need to own at least 20% of your home’s value.
2. New Home AppraisalThe lender will need a new appraisal to check your home’s current value.
3. Credit Score of at Least 620A credit score of 620 or higher is usually required.
4. Debt-to-Income (DTI) Ratio of 43% or LessThis means your monthly debt payments should be less than 43% of your monthly income.
5. Loan-to-Value (LTV) Ratio of 80% or LessAfter the cash-out, the loan amount shouldn’t be more than 80% of your home’s value.
6. Proof of Income and EmploymentYou’ll need to show that you have a steady income and job.

These are typical requirements for conventional cash-out refinances. FHA and VA cash-out loans have a few different rules.

• Ownership Time (Seasoning Requirement)You must have owned your home for a certain amount of time. For conventional loans, it’s usually 6 months. FHA loans require 12 months, and VA loans require at least 210 days.
• Debt-To-Income RatioThis is a comparison of your monthly debt payments to your income. Most cash-out refinances want a DTI ratio of 50% or lower.
• Credit ScoreWhile a high credit score isn’t required, a better score can get you lower interest rates. Most lenders want a score between 620-680.
• Home EquityYou need enough equity in your home. Most lenders want you to still own at least 20% of the home’s value even after taking cash out.

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The amount of cash you can get from a cash-out refinance depends on your home’s current value and your remaining mortgage balance.

Most lenders allow you to borrow up to 80% of your home’s appraised value. For instance, if your home is worth $400,000, you could borrow up to $320,000. After paying off your existing mortgage balance (e.g., $200,000), you would receive the remaining amount as cash (in this example, $120,000).

VA cash-out refinances are an exception, allowing you to borrow up to 100% of your home’s value.

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Here is the difference between cash-out refi vs. home equity loan: