FHA Cash Out Refinance: How It Works, Requirements, and Benefits

How Does an FHA Cash Out Refinance Work?

An FHA cash out refinance replaces your current mortgage with a new FHA loan. The new loan amount can be up to 80% of your home's appraised value, subject to FHA loan limits and lender approval. After your existing mortgage is paid off, you may receive the remaining eligible funds as cash. You'll continue making payments on the new loan while accessing a portion of your home equity, which is the difference between your home's current value and what you still owe on your mortgage.

Common uses of FHA cash out refis include:

• Changing from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.
• Consolidating high-interest debt, such as that from credit cards, into a single lower-interest payment.
• Lowering your interest rate.
• Accessing cash to make home improvements that could increase home value.
• Using funds to pay for education or medical expenses.

Regardless of what you choose to do with your funds, an FHA cash out refinance can help you reach your financial goals.

By refinancing, the total finance charges may be higher over the life of the loan.

FHA Cash Out Refinance Example

Here’s an example to help you better understand how an FHA cash out refinance might work in real life:

• Current home value: $500,000
• Current mortgage balance: $100,000
• Maximum FHA loan amount (80% loan-to-value ratio): $400,000 (80% of $500,000)
• Mortgage balance paid off at closing: $100,000
• Estimated maximum cash available: $300,000 (before closing costs and other fees)
• New mortgage amount (if approved for the maximum): $400,000

In this example, the borrower may receive up to $300,000 in cash, minus any applicable closing costs, prepaid expenses, and other fees.

Keep in mind that this is a simplified example, assuming the borrower is approved for the maximum potential loan amount. The amount you may be eligible to borrow and the cash you could receive depend on factors such as your home's appraised value, your outstanding mortgage balance, closing costs, lender requirements, and FHA loan limits. 

Key Requirements: FHA Cash Out Refinance Eligibility

To qualify for an FHA cash out refinance, you must meet the following eligibility criteria:

• Appraisal value: The home must be professionally appraised to assess its current value.
• Application: An application with proper financial documentation must be submitted to an FHA-approved lender and approved.
• Credit score: Generally speaking, you’ll need a minimum credit score of 580. That said, some lenders, such as Freedom Mortgage, will accept a score as low as 550.
• Equity and loan-to-value ratio (LTV): There must be enough equity in the home to qualify. Your lender will also consider your loan-to-value (LTV) ratio, which compares your mortgage balance to your home's appraised value. Typically, you can borrow up to 80% of a home’s value minus the amount you owe on your current mortgage.
• Occupancy: You must have resided in the home for a minimum of one year, and the house must be your primary residence.
• Payment records: Mortgage payments must have been paid on time for the last 12 months unless the home has been owned for less than a year.
• Title: There can’t be any liens or claims that would impair your title.

Pros and Cons of FHA Cash Out Refinances

Comparing the pros and cons can help you determine whether pursuing an FHA cash out refinance is the right choice to help you reach your financial goals and long-term plans:

An FHA cash out refinance can be a useful way to access your home's equity, but it also means replacing your current mortgage with a larger loan. Before moving forward, consider how the new loan amount, monthly payment, and long-term borrowing costs fit into your overall financial situation.

FHA vs. VA vs. Conventional Cash Out Refinance Loans

If you’re wondering which cash out refinance makes the most sense for you, let’s compare FHA, conventional, and VA options:

If you have strong credit, another option you could consider is a home equity line of credit (HELOC), which generally wouldn’t require mortgage insurance.

How to Get an FHA Cash Out Refinance Loan

You can better understand the process of getting an FHA cash out refinance loan by reviewing these key steps:

1. Determine the amount of money you need to complete the task you’d like to tackle with your cash out refinance funds.
2. Get an estimate on how much money you could receive using a cash out refinance calculator.
3. Talk with an FHA-approved loan advisor to apply. You’ll need to provide specific financial information about your current income, employers, credit history, debts, and more.
4. Your lender will order a professional home appraisal to calculate your home’s actual current value.
5. Start the underwriting process. This is where your lender will formally verify your eligibility for an FHA cash out refinance loan.
6. Close on your new loan. Once your old mortgage is paid off and you pay any closing costs or other fees, you’ll pocket the leftover funds.

Freedom Mortgage is here to help throughout the process.

FHA Cash Out Refinance FAQs

Have additional questions about FHA cash out refinances? We’ve got you covered.

How Much Can You Borrow with an FHA Cash Out Refinance?

Generally speaking, you can borrow up to 80% of your home’s current value with an FHA cash out refinance. The amount you actually cash out will be less than this, however, as you have to use part of that money to pay off the remainder of your first mortgage. You’ll also have to consider various closing costs.

What Are the Interest Rates on an FHA Cash Out Refinance?

As with any type of loan, FHA cash out refinance loans come with an interest rate likely affected by your personal credit score, income, and finances, as well as the mortgage market and the amount of equity you have in your original home loan.

Can You Get an FHA Cash Out Refinance More Than Once?

Yes, you may be able to get an FHA cash out refinance more than once if you continue to meet FHA and lender requirements. Each refinance is treated as a new loan, so you'll need to qualify based on factors such as your home equity, credit, income, and occupancy, and your lender will evaluate your eligibility at the time you apply.

Final Thoughts: Is an FHA Cash Out Refinance Right for You?

An FHA cash out refinance can be a helpful way to access your home equity for expenses like home improvements, debt consolidation, or other financial needs by replacing your existing mortgage with a new FHA loan. However, it increases your mortgage balance and uses your home as collateral, so it's important to carefully consider if the cash in hand is worth stretching your monthly budget.

If you’re ready to move forward with an FHA cash out refinance, Freedom Mortgage can help you explore your options. Get started by getting prequalified to see how much you may be able to borrow.