FHA Cash Out Refinance Guide — Home.Loans (2024)

FHA Cash-out Refinance Guidelines

Assets

No funds are needed to close an FHA cash-out refinance loan. Asset verification through a bank and/or investment statements are usually not required. However, the FHA lender may request bank statements as part of its own underwriting process.

Appraisal

FHA lenders evaluating an FHA cash-out loan application will require a new appraisal for the property. This is because the value from the appraisal is used to determine the maximum allowable loan amount. Currently, the maximum loan amount for an FHA cash out refinance is 85 percent of the value of the property as long as the home was purchased more than one year ago and does not exceed FHA county-by-county loan limits.

Co-borrowers

Non-occupant co-borrowers are not allowed for cash-out loans. That means you can’t add a borrower to the loan who doesn’t live in the home. In other words, you can’t have your name on a relative’s FHA cash-out loan.

Credit Scores

The minimum credit score for all FHA loans is 580. While there are no minimum credit score requirements established by the FHA for cash-out loans specifically, lenders will typically have their own internal requirements that are much higher than the minimum. The minimum credit score minimum requirement for an FHA cash out refinance is usually between 620 and 680.

Debt-to-Income Ratio

The FHA wants to ensure a borrower will be able to make the monthly payments. This way, they help prevent people from getting a mortgage they can’t afford. So they look at a borrower’s debt-to-income ratio.

FHA cash-out loans require the borrower to meet existing debt to income ratio guidelines. The maximum FHA debt ratio guidelines are 29 and 41 but may be higher in certain instances. The first ratio, 29, is the housing ratio calculated by dividing the total housing payment with gross monthly income. The housing payment includes principal and interest, taxes, insurance, monthly mortgage insurance premium, and any condo or homeowner association fees.

For example, if the housing payment is $2,000 and monthly income is $7,000, the housing debt ratio is 28.5%. A borrower with $7,000 per month income could have a house payment up to $2,030 per month and monthly credit obligations of up to $840 per month.

The total debt ratio limit is 41 and includes the housing payment plus additional monthly credit obligations. Additional credit obligations include credit card payments, automobile or student loans and installment debt. Other qualifying debt includes spousal or child support payments. This number does not include utilities, car insurance, or other non-debt payment types.

Ordinarily, FHA loans allow for a DTI of no more than 43 percent. In some cases, though, the FHA may allow borrowers with significant “compensating factors” to qualify with up to 50% DTI. These compensating factors can include a high credit score, a large down payment, or other qualifiers (like purchasing an energy-efficient home).

Income

The FHA cash out refinance requires sufficient income to qualify for the new loan. Borrowers will verify their income with at least two most recent paycheck stubs from their employer showing current and year to date earnings, at least two years of W2 forms, and in many instances, the two most recently filed federal income tax returns.

Length of ownership of the home

If you’ve lived in the home less than a year, the FHA lender will use the lower of the appraised value or the original purchase price of the home to determine your maximum loan amount. For example, if you purchased the home less than a year ago for $250,000 and it now appraises for $270,000, your maximum loan amount will be $212,500 (85% of $250,000).

Loan Limits

In 2018, the maximum FHA loan limit is $294,515 for most areas of the country. In some areas like Los Angeles and New York City, maximum loan amounts can go as high as $679,650.

Maximum Loan to Value

The maximum LTV for FHA cash-out refinances is 85 percent of the property’s current value. You calculate the LTV ratio by dividing the loan amount requested by the property value from the current appraisal.

Occupancy

FHA cash-out refinance loans are for owner-occupied properties only and cannot be used for rental properties.

Payment History Requirements

The borrower must provide documentation proving they’ve made all the monthly payments on time for the last 12 months (or since the beginning of the loan, whichever is less). A mortgaged property must have 6 months of payments at minimum before you can apply to refinance.

Second Mortgages

Unless both loans add up to 85% of the home’s value or less, you can’t add a second mortgage to an FHA cash-out loan. In some cases, you might be able to keep an existing second mortgage if you can subordinate it under the FHA loan. (Subordinating a loan involves receiving approval from the second mortgage lender agreeing that its loan is a lower priority than the FHA loan.)

Homes Owned Less Than One Year

If the borrower has had a mortgage for at least 12 months, the most recent 12 mortgage payments must have been made on time. If the borrower has had a mortgage for less than a year, they must have made at least six payments on the current mortgage.

Let’s say you bought a home in May, and your first payment is due in July. This means you’ll need to make all payments on time from July through December before you’re eligible to apply for a cash-out loan—whether or not you have an FHA loan.

Credit Scores And LTV

An FHA cash-out loan has more relaxed guidelines than a conventional cash-out loan. This means borrowers with higher debt-to-income ratios and lower credit scores can qualify.

The absolute minimum credit score for FHA loans is 500, assuming a 10% down payment. The FHA cash-out refinance requires 15%. But most lenders require a much higher credit score than 500. Because cash-out lenders are more careful with approvals than home purchases, you’ll probably need a minimum score between 600 and 660 to qualify for FHA cash out.

FHA cash out maximum loan-to-value is 85% of the home’s current value (a new appraisal is required). Compare that with a maximum conventional cash out LTV of 80%. The higher limit is why many homeowners choose FHA cash-out loans instead of conventional.