All You Need to Know About the FHA Cash-Out Refinance

Read Time: 7 minutes

In today’s financial landscape, you may be seeking ways to leverage your most valuable asset—your home—to address your financial needs. One powerful tool at your disposal is the FHA cash-out refinance plan. 

This program offers a pathway to access the equity built up in your home by replacing your existing mortgage with a new, larger refinance loan. This allows you to convert up to 80% of your property’s value into cash to meet various needs, from consolidating debt to making major purchases. 

What is an FHA Cash-Out Refinance?

An FHA cash-out refinance, or the FHA cash-out plan, is a mortgage refinancing option backed by the Federal Housing Administration (FHA) that allows homeowners to convert a portion of their home equity into cash. Unlike traditional refinancing, the FHA cash-out plan is designed specifically for homeowners looking to access their equity. 

You may hear the FHA cash-out plan referred to as a “FACOP” refi, meaning a “Federal Assistance Cash-Out Program” refinance loan. Though some lenders may use these terms interchangeably for marketing purposes, this is not an official term for an FHA cash-out refinance. 

If you come across FACOP refi terminology, be sure to carefully evaluate the offer’s validity. Remember, all legitimate FHA cash-out refinance loans are backed by the Federal Housing Administration.

How Does the FHA Cash-Out Plan Work?

An FHA cash-out refinance allows homeowners to get a new loan for more than they owe on their current mortgage by using their home equity. Home equity is the difference between your home’s current value and what you still owe on your mortgage. The more equity you have, the more cash you can get.

Here’s how it works: You take out a new, bigger loan to replace your current mortgage. The new loan amount depends on your home equity. The extra amount, which is the difference between the new loan and what you owe on your old mortgage, is given to you in cash.

The cash that you receive from an FHA cash-out, can be used for virtually any purpose. So, whether you’re looking to remodel your home, pay off credit card debt, or cover college tuition, this refinancing option can provide the financial boost you need.

FHA Cash-Out Refinance Guidelines

To take advantage of an FHA cash-out refinance, you must meet specific guidelines and requirements, including:

  • Maximum Loan-to-Value (LTV) Ratio: Your LTV ratio cannot exceed 80%. This means you need to have more than 20% equity in your home to qualify.
  • Minimum Credit Score: Although the minimum credit score can be as low as 500, most lenders prefer borrowers to have a median credit score of 620 or higher.
  • Maximum Debt-to-Income (DTI) Ratio: In most cases, your DTI ratio should not exceed 43% to qualify for this refinancing option.
  • No Unpaid Federal Debt: Applicants must not have any unpaid federal non-tax debts to be eligible.
  • Primary Residence Requirement: The home you’re refinancing must be your primary residence.

You can qualify for an FHA cash-out plan even if your current mortgage isn’t an FHA loan. However, the new loan you’re applying for under this program will be an FHA loan.

Waiting Period and Seasoning Requirements

The FHA stipulates a minimum occupancy period of 12 months before applying for a cash-out refinance, with some exceptions for individuals who currently own or have recently inherited their home. Over these 12 months, all mortgage payments must have been made on time and in full to qualify.

The FHA Cash-Out Plan Process

The FHA cash-out refinance process involves several steps and considerations, from determining how much you can borrow to estimating how much cash you can take out. 

Let’s walk through these steps and calculations with an example:

Step 1: How Much Can You Borrow?

The FHA cash-out plan allows you to borrow up to 80% of your home’s current market value. For instance, if your home is valued at $300,000, the maximum loan amount you could secure would be $240,000. 

FormulaHome Value x 80% = Maximum FHA Cash-Out Loan Amount
Example$300,000 x 80% = $240,000

Step 2: How Much Cash Can You Get?

Say you currently owe $150,000 on your mortgage. With a home value of $300,000 and a maximum borrowing amount of $240,000, you would have $90,000 available to borrow. 

FormulaFHA Cash-Out Loan Amount – Existing Loan Balance = Maximum Cash Back
Example$240,000 – $150,000 = $90,000

Step 3: What Will It Cost You?

Upfront Insurance: An FHA cash-out plan charges a 1.75% upfront mortgage insurance fee on the new loan amount. If you take out an FHA cash-out refinance loan of $240,000 (the maximum loan amount found in step 1), this fee amounts to a one-time, upfront cost of $4,200.

Formula1.75% x FHA Cash-Out Loan Amount = Upfront Mortgage Insurance Fee
Example1.75% x $240,000 = $4,200

Ongoing Insurance: There’s also a recurring annual insurance cost; for many, this is typically 0.85% of the loan, divided over monthly payments. For a $240,000 loan, this comes to about $2,040 yearly, or an estimated $170 added to your monthly payment.

Formula0.85% x FHA Cash-Out Loan Amount = Annual Mortgage Insurance Fee
Example0.85% x $240,000 = $2,040
FormulaAnnual Mortgage Insurance Fee / 12 = Monthly Mortgage Insurance Cost
Example$2,040 / 12 = $170

Closing Costs: Similar to the initial home purchase, you’ll face closing costs again. Closing costs are typically around 3% of the new loan amount, which would be about $7,200 in this scenario. You might have the option to roll these costs into your loan to avoid paying them upfront.

Formula3% x FHA Cash-Out Loan Amount = Closing Costs
Example3% x $240,000 = $7,200

Step 4: The Final Result

After completing this example FHA cash-out plan, you would receive an estimated $90,000 in cash and a new FHA mortgage with a balance of $240,000

With an FHA cash-out refinance, you may have the option to roll your closing costs into the loan. In this scenario, that means the $4,200 upfront insurance fee and estimated $7,200 in closing costs could be added to your loan amount, sparing you from immediate out-of-pocket expenses. However, this would increase your loan balance and, consequently, your monthly mortgage payments.

This example simplifies the FHA cash-out refinance process and provides estimated values to give you a basic understanding of how the loan program works. Remember, every homeowner’s financial situation is different. Getting pre-qualified with multiple lenders is the best way to get an accurate estimation. They can guide you through how much you can borrow, the costs involved, and whether this refinancing option suits your needs.

Pros and Cons of an FHA Cash-Out Refinance

When considering an FHA cash-out refinance, it’s helpful to weigh the benefits against the drawbacks to make an informed decision. Let’s explore the advantages and disadvantages of an FHA cash-out plan:

ProsCons
Access to CashClosing Costs and Fees
Potentially Lower RatesMortgage Insurance Premiums
Flexible Qualification CriteriaReduced Home Equity
Ability to Consolidate DebtSubject to Loan Limits

Advantages

  • Access to Cash: One of the biggest perks is turning your home equity into a lump sum of cash. This money can be used for anything, such as renovating your house, paying off credit card debt, or covering unexpected expenses. It creates a flexible way to access funds when you need them.
  • Potentially Lower Rates: Refinancing your mortgage might lead to a lower interest rate, especially if market rates have dropped since you first got your mortgage. A lower rate means you could pay less on your monthly mortgage, saving money over time.
  • Flexible Qualification Criteria: FHA loans are known for their lenient qualification requirements, making it easier for more people to qualify. This is great news if your credit score isn’t perfect, but you still need access to refinancing options.
  • Consolidate Debt: If you’re juggling multiple high-interest debts, using your FHA cash-out funds to pay them off can consolidate your debts into one manageable payment. This can simplify our finances and lead to lower overall interest costs.

Disadvantages

  • Closing Costs and Fees: As with your original mortgage, refinancing comes with closing costs and fees. These expenses can be significant, often amounting to thousands of dollars. Although some fees may rolled into your loan, they would ultimately increase the total loan cost.
  • Mortgage Insurance Premiums: FHA loans require upfront and annual Mortgage Insurance Premiums (MIPs), which can add to the cost of your loan. These premiums are required regardless of how much equity you have in your home.
  • Reduced Equity: By cashing out part of your equity, you’ll have less equity left in your home. This increases your loan balance and may limit your financial options in the future. It’s important to consider whether the immediate cash need outweighs the benefit of retaining equity in your home.
  • Loan Limits: FHA has maximum loan limits that vary by county in the US. These limits typically start at $498,257 for a single-family home in most counties, but may be up to $1,149,825 in areas with high costs of living. If your home’s value greatly exceeds these limits, you may not be able to borrow as much as you’d like, limiting the effectiveness of a cash-out refinance.

How to Apply for an FHA Cash-Out Refinance

Applying for an FHA cash-out refinance doesn’t have to be complicated. Once you’ve chosen a lender, you will fill out a loan application and provide your financial information. Your lender will evaluate your application and determine if you meet the requirements to be approved for an FHA cash-out plan. 

By first reviewing your financial situation, comparing lenders and gathering the necessary documentation, you can stay prepared and minimize potential setbacks. If you find that an FHA cash-out plan doesn’t suit your needs, keep in mind that there are other options available, from home equity loans to HELOCs.