FHA Cash Out Refi: What You Need to Know

The FHA cash out refi can be a game-changer for homeowners who need access to cash. The maximum loan-to-value (LTV) ratio for an FHA cash out refi is 85%, meaning you can borrow up to 85% of your home's value.

To qualify for an FHA cash out refi, you'll need to have at least 6 months of mortgage payments in reserve. This is a key requirement to ensure you can afford the loan payments, even with a cash-out.

The FHA cash out refi allows you to tap into your home's equity, but it's essential to understand the benefits and drawbacks. You can use the cash for various purposes, such as paying off high-interest debt or financing home improvements.

The process of getting an FHA cash out refi typically takes 30-45 days from application to closing.

To qualify for an FHA cash-out refinance, you'll need to meet minimum home equity requirements and your lender's standards regarding your income, credit, and loan amount.

You can refinance into an FHA loan even if you originally purchased your home with a conventional loan.

The FHA cash-out refinance process is similar to a traditional mortgage application, but with the added benefit of cash out funds to support your financial goals.

An appraisal will determine how much you can borrow, which is up to 80% of your property's value.

You can borrow less than the maximum amount, so you don't have to take out the full 80% if you don't need it.

Closing costs average about 4% of the loan's principal, which you'll need to factor in if you plan to roll those expenses into the new mortgage.

You'll need to establish a new escrow account as part of your FHA cash-out plan.

FHA cash-out mortgages require mortgage insurance, similar to other FHA programs.

Borrowers with good credit and more than 20% equity in their homes may be better served by refinancing into a conventional loan.

To qualify for an FHA cash out refinance, you'll need to meet certain eligibility requirements. The property must be your primary residence, and you'll need to have lived in the property for at least the last 12 months.

You'll also need to have a minimum credit score of 580, although some lenders may have stricter standards. A higher credit score can lead to better terms and interest rates, so it's worth working to improve your credit before applying.

Your debt-to-income (DTI) ratio will also be evaluated, and in most cases, it can't exceed 43 percent. You'll need to have a good payment history on your mortgage, with no late payments in the past 12 months.

The loan-to-value (LTV) ratio is another important factor, and you'll need to have at least 20 percent equity in your property after the cash-out refinance. There's also a cap on how much you can borrow, which varies depending on the location and type of property.

Here are the key eligibility requirements in a nutshell:

These requirements are designed to ensure that you have the financial stability to manage the new loan terms and make timely payments.

With an FHA cash out refi, you can access up to 80% of your home’s appraised value.

This limit ensures that you retain some equity in your home as a safety buffer.

The amount of money you can get from an FHA cash-out refinance depends on several factors. You can access up to 80% of your home's appraised value, but you must have at least 20% of equity left over after refinancing and taking out some cash.

To determine how much equity you have, you can use websites like Zillow for an estimate or pay for an appraisal. Then, subtract what you owe on your mortgage from your home's estimated value. For example, if you owe $250,000 but your home is worth $450,000, you would have $200,000 of equity.

The cash-out amount can't exceed 80% of the home's appraised value. So, assuming your home's value is sitting around $250,000, you'll be required to leave at least $50,000 (20% of the home's value) untouched. This leaves you with around $20,000 to cash out, though you'll still need to pay closing costs, which typically cost 2% – 6% of the total loan amount.

Here's a rough breakdown of how much money you can access with an FHA cash-out refinance:

Keep in mind that these are general guidelines, and the specific details of your situation may vary. It's always a good idea to consult with a lender or financial advisor to get a more accurate estimate of how much money you can access with an FHA cash-out refinance.

FHA cash-out refinances typically have lower interest rates, averaging 10-15 basis points (0.10%-0.15%) lower than conventional cash-out refinance loans.

You'll need to pay a mortgage insurance premium, which includes an upfront cost of 1.75% of the new loan amount and ongoing monthly payments of 0.85% of the loan amount annually in 12 payments per year.

Closing costs for an FHA cash-out refinance can range between 2% and 6% of the loan amount, so if you're taking out $250,000, those closing costs might be as low as $5,000 or as high as $15,000.

FHA cash-out refinances typically have lower interest rates, averaging 10–15 basis points (0.10%–0.15%) lower than conventional cash-out refinance loans.

The lower interest rates on FHA cash-out refinances come with a trade-off: you'll need to pay mortgage insurance premiums. These premiums include an upfront payment of 1.75% of the new loan amount and annual payments of 0.85% of the loan amount, spread out over 12 payments per year.

These mortgage insurance premiums can add up quickly, but the lower interest rates may still save you money in the long run.

The costs associated with an FHA cash out refinance can add up quickly, but understanding what to expect can help you prepare.

Typically, closing costs range between 2 percent and 6 percent of the loan amount.

You'll also need to pay an upfront FHA mortgage insurance premium (MIP) of 1.75% of the loan amount, which can often be rolled into your loan balance.

This upfront premium can be significant, as in the case of a $250,000 loan, where you'd owe an upfront MIP of $4,375.

If you're considering an FHA cash out refinance, you may be wondering if there are other options available. FHA Streamline refinance allows FHA borrowers to replace their loan without an appraisal, but it won't let you access your equity.

If you have good credit and substantial equity, a conventional cash-out refinance might be a better fit. This option allows you to access funds and remove your FHA mortgage insurance all at once.

You can also consider using a home equity loan or HELOC, which lets you keep your current home loan intact while accessing the equity in your home.

FHA cash-out refinances can have several distinct advantages, including lower interest rates and the opportunity to tap into equity that can be used to fulfill any of your heart's desires.

Lower interest rates are a major perk of FHA cash-out refinances, making them a more attractive option for homeowners.

The lower credit score requirements of FHA loans make it easier to qualify for, which is a significant advantage for those who may have struggled with conventional loan requirements in the past.

FHA loans are also popular due to their competitive interest rates, giving borrowers a better chance of securing a lower interest rate compared to a conventional loan.

However, it's essential to consider the drawbacks of FHA cash-out refinances before applying for a loan.

Some of the potential downsides of FHA cash-out refinances include the need to consider the risks of taking on more debt and the possibility of higher interest rates if the market changes.

The unique opportunity to leverage the equity in your home for various purposes is a significant benefit of cash-out refinances, but it's crucial to weigh this against the potential drawbacks.

You can refinance your FHA mortgage to tap into your home's equity with a cash-out refi. This type of refinance allows you to borrow more than you owe and receive the difference in cash.

The maximum loan-to-value (LTV) ratio for an FHA cash-out refi is 85%, which means you can borrow up to 85% of your home's value.

You can use the cash from the refinance for any purpose, such as paying off high-interest debt, financing home improvements, or covering unexpected expenses.

The FHA requires a credit score of at least 500 to qualify for a cash-out refi, but borrowers with lower credit scores may still qualify with a higher down payment.

Closing costs for an FHA cash-out refi can range from 2% to 5% of the loan amount, and you'll need to pay these costs out of pocket.