FHA Cash-Out Refinance Guide

If you're a homeowner needing cash, you might look to an FHA cash-out refinance. This program allows you to take out a larger mortgage than you currently have and get the difference back in cash. You can then use this money for anything — paying off debt, covering home repairs, or any other need you might have.

Are you considering an FHA cash-out refinance to cover an expense in your life? Here's what you need to know.

How does an FHA cash-out refinance work?

An FHA cash-out refinance works like this: you apply for a new mortgage loan that's larger than the balance on your current loan. Then, that new loan pays off your old balance, and the lender gives you the difference between those two balances in cash after closing.

Keep in mind that an FHA cash-out refinance replaces your old mortgage loan entirely, giving you a new rate, term, and monthly payment. Depending on your qualifications, how much you're borrowing, and market conditions, this could mean getting a higher interest rate or payment than before.

Doesn't sound like a good fit?
Check out the other FHA refinance loan options

FHA Cash-Out Refinance Requirements

The main requirement for an FHA cash-out refinance is having at least 20% equity in your home. This means you need to own 20% or more of your home's value outright. Home equity is the amount of your home's value that you don't owe to the lender. So if you have $80,000 (20%) paid off on a $400,000 mortgage, that means your cash-out refinance amount needs to be $320,000 or less.

In addition to the equity requirement, you also typically need:

• A FICO® score of 580 or higher
• An acceptable DTI ratio
• To have lived in the home as your primary residence for at least one year
• To have paid your last 12 mortgage payments on time

While the Federal Housing Administration sets the bare minimum requirements for FHA loans, lenders are free to be more stringent with their requirements.

While the FHA technically permits credit scores as low as 500 with a 10% down payment, the final decision is up to the lender. Many lenders set higher credit score requirements to reduce risk and ensure loan stability. Neighbors Bank's FHA cash-out refinance credit score requirement is 620.

Additionally, FHA loans have flexible debt-to-income requirements, however, 43% or lower is preferred.

Want to see if you meet the requirements?
Get started today

How to Apply for an FHA Cash-Out Refinance

To apply for an FHA cash-out refinance, you first need to find an FHA-approved lender. Not all mortgage lenders offer FHA loans — and even among those that do, not all offer cash-out refinances.

Once you find a lender, you need to fill out their application and submit financial documents, just as you did with your original loan.

This will include things like:

• W-2s
• tax returns
• bank statements

Your lender will also order an appraisal, which they'll use to verify the value of your home and how much you can borrow against it.

Finally, you close on the loan. This is when you pay your closing costs — including your upfront mortgage insurance premium (UFMIP) of 1.75%. After that's complete, the new loan pays off the old one, and you get a lump sum payment in return. You'll start making payments toward your new loan the next month.

Benefits of the FHA Cash-Out Refinance

FHA cash-out refinances have some big perks. First, FHA loans are easier to qualify for than many other programs, so they are available to borrowers with lower credit scores and other challenging financial circumstances. They also have low mortgage rates compared to other loan programs, and you can use the funds any way you like.

Ways You Can Use Your Funds

Cash-out refinances can be used for virtually anything. Here are some ways that you could benefit from this loan program:

• Pay off debt
• Fund home improvement projects
• Cover education expenses
• Build an emergency fund
• Invest the money
• Take a vacation
• Cover recent medical bills (if needed)

Just keep in mind that when you take out a cash-out refinance, you are putting your home as collateral, so there's always the risk of foreclosure if financial difficulties make it hard to keep up with higher payments. Make sure to carefully weigh your options.