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If you’re a homeowner with an outstanding FHA loan, you may be able to access your equity through an FHA cash-out refinance.
The average American homeowner has $136,000 in tappable equity according to the latest Mortgage Monitor Report by Black Knight, a mortgage data analytics company. If you’re trying to cash-out on your home, we cover the FHA cash-out guidelines issued by the Department of Housing and Urban Development (HUD).
- Is it possible to complete a cash-out refinance through the FHA?
- How does an FHA cash-out refinance work?
- How do I qualify for an FHA cash-out refinance?
- Disadvantages of an FHA cash-out refinance
- FHA cash-out refinance vs. conventional cash-out
Is it possible to complete a cash-out refinance through the FHA?
Yes. The Federal Housing Administration (FHA) allows cash-out refinances for qualifying borrowers.
As of Sept. 1, 2019, you will only be able to borrow up to 80% of your home’s value through an FHA cash-out refinance.
An FHA cash-out refinance will pay off your current FHA loan and allow you to take the remainder of the balance — as noted, up to 80% of your home’s value — as cash.
For example, if your home is valued at $250,000 but you don’t have a loan balance, your FHA cash-out refinance could be for as much as $200,000. If your current loan balance is $150,000, you could qualify for as much as $50,000 in cash.
An FHA cash-out refinance can be particularly helpful to borrowers who are struggling to improve their credit score, pay expenses or make home improvements, yet they have significant equity in their homes. The equity may have been built up by paying down your FHA loan over many years or making extra payments. Or, it could have been through an appreciating real estate market.
Why should I cash-out refinance through the FHA?
There are other reasons that borrowers may choose an FHA cash-out refinance:
- To pay off high-interest credit card debt, tax bills or medical bills
- To pay college tuition
- To make a large purchase, such as a car
A cash-out refinance can be a way to access a large sum of money and repay that money over a long mortgage term, such as 15 or 30 years — often at a lower interest rate than other forms of borrowing.
An FHA cash-out refinance typically follows more lenient guidelines, such as a lower credit score, than conventional cash-out refinance loans (more on this later). However, FHA loans require mortgage insurance premiums (MIPs), so borrowers should compare their options for conventional and FHA cash-out refinancing to see which offers the better option.
Both FHA — reminder, as of Sept. 1, 2019 — and conventional cash-out refinance programs allow homeowners to borrow a maximum of 80% of their home’s value.
How does an FHA cash-out refinance work?
Applicants for an FHA cash-out refinance need to meet a variety of requirements for approval. Note that you can do an FHA cash-out refinance with either an FHA loan or a conventional loan if you meet the loan guidelines.
FHA cash-out guidelines
FHA cash-out loan requirements include:
- You must have owned and occupied the property as your primary residence for the past 12 months
- You must have made on-time payments the past 12 months — or since you got the mortgage if it’s been less than 12 months
- The amount you want to borrow must be within the loan limits for your county
- Your credit score must be 500 or higher, though lenders can set their own minimums
- Your maximum debt-to-income (DTI) ratio must be 50% or less, meaning that all your recurring monthly debt payments — including the new loan payment — can be no more than 50% of your gross monthly income
- The maximum you can borrow as of Sept. 1, 2019, is 80% of your home’s value; the total was previously 85%
- Your lender will need an appraisal of your property to evaluate its value
How do I qualify for an FHA cash-out refinance?
You’ll need to contact an FHA-approved lender to be sure, but you can ask yourself the following questions to help you determine your eligibility:
- Is the difference between your estimated home value and your loan balance more than 20%? You can only borrow up to 80% of your home’s value with a cash-out refinance.
- Is your credit score above 500? A higher score will make it easier to qualify.
- Have you made all your mortgage payments on time in the past 12 months?
- Is your DTI ratio 50% or less?
- Is the amount you want to borrow within the FHA loan limits for your area?
- Can you qualify for the loan without the income of a nonoccupant co-borrower, such as your parents or other relatives? Nonoccupant co-borrowers are not allowed with an FHA cash-out refinance.
Disadvantages of an FHA cash-out refinance
While an FHA cash-out refinance may seem like a lifesaver if you are in need of cash, the decision to take cash from your equity shouldn’t be taken lightly.
Some important things to consider include:
- Since your loan balance is increasing, your payments could be higher with the new loan depending on your previous loan terms.
- Your collateral for the loan is your house, so if you can’t make the payments, you could lose the house.
- There is always a possibility that home values will decline, in which case you could have far less equity than you expect should you need to sell.
- FHA loans require mortgage insurance, which adds to your monthly payments. An upfront mortgage insurance premium of 1.75% is applied to FHA loans. For example, on a $250,000 mortgage, you would pay $4,375. Also, an ongoing annual mortgage insurance premium of 0.45% to 1.05% will be paid in 12 installments with your monthly mortgage payment.
- Closing costs for your FHA refinance may reduce some of the cash you can access.
FHA cash-out refinance vs. conventional cash-out
The primary difference between an FHA cash-out refinance and a conventional cash-out refinance is the ability to qualify.
FHA loans allow for lower credit scores than a conventional loan. Also, FHA cash-out refinancing is only available on a principal residence, while conventional cash-out refinancing can be done on a second home or investment property.
FHA loan rates may be slightly higher than conventional mortgage rates, while FHA loans also require mortgage insurance, which would increase your monthly payments. Conventional loans don’t require mortgage insurance on mortgages when the borrowers have at least 20% in home equity.
FHA loan limits range from $314,827 in low-cost areas to $726,525 in high-cost areas, while conventional loans limits are $484,350, or $726,525 in high-cost housing markets.
FHA vs conventional comparison
|Credit score||500 or higher||640 or higher|
|Occupancy||Primary residence||Primary, second home, investment property|
|Co-borrower||Must be occupant||Nonoccupant with lower LTV ratio|
|Loan limits||$314,827 to $726,525||$484,350 to $726,525|
Besides considering conventional and FHA cash-out refinance options, you may want to look at other possibilities to get the cash you need.
You may need to improve your credit to qualify for these choices, but you could talk to a mortgage lender about whether a home equity line of credit or home equity loan would be a better solution to access the value in your home.