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The FHA cash-out refinancing option is especially beneficial to homeowners whose property has increased in market value since the home was purchased. Borrowers will need at least 15 percent equity in the property based on a new appraisal.

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January 21, 2019
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FHA Cash-out Refinance Mortgages

Sometimes It Pays to Refinance

The FHA cash-out refinance option allows homeowners to pay off their existing mortgage, and create a larger home loan that provides them with extra cash. The amount of money that can be borrowed depends on the amount of equity that's been built up in the home's value. To be eligible for an FHA cash-out refinance, borrowers will need at least 15 percent equity in the property based on a new appraisal. Equity is the difference between the current value of a property and the amount owed on the mortgage.

In the following example, a borrower obtained an FHA loan of $275,000 to purchase a home. He makes his monthly payments as agreed. As of today, the value has increased to $350,000 with a balance of $250,000 owed on the mortgage. In this example, a loan of up to 85 percent of the appraised value of the home would be permissible ($350,000 x .85 = $297,500). When subtracting the amount that is still owed on the existing mortgage ($250,000) leaves a maximum “cash-out” amount of $47,500 (less closing costs).

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FHA Cash-out Refinance Guidelines

  • Credit Scores

    According to FHA guidelines, applicants must have a minimum credit score of 580 to qualify for an FHA cash-out refinance. Most FHA insured lenders, however, set their own limits higher to include a minimum score of 600 - 620, since cash-out refinancing is more carefully approved than even a home purchase. Some companies require at least one credit score for all qualifying borrowers. Others require that you use the middle score if there are three applicable scores, or use the lower in case of two. The lowest credit score would be used for qualification purposes. Consult your licensed loan officer regarding the lending institution's credit requirements in such cases.

  • Debt-to-Income Ratio
    The FHA has guidelines regarding an applicant's debt-to-income ratio in order to keep people from entering into mortgage agreements that they cannot afford. Therefore, many borrowers choose to pay off certain debts to keep the ratio low. There are two different calculations to take into account:

    Mortgage Payment Expense to Effective Income
    This is calculated by dividing your total housing payment by your income. Add up the total mortgage payment (principal and interest, escrow payments for taxes, hazard insurance, mortgage insurance premium, homeowners' association dues, etc.). Take that amount and divide it by gross monthly income. The maximum ratio to qualify is 31 percent.

    Total Fixed Payment to Effective Income
    Add up the total mortgage payment (principal and interest, escrow payments for taxes, hazard insurance, mortgage insurance premium, homeowners' association dues, etc.) and all recurring monthly expenses and installment debt (car loans, personal loans, student loans, credit cards, etc.). Take that amount and divide it by gross monthly income. This gives you the total debt ratio that includes monthly credit obligations, which needs to be lower than 43 percent to qualify.

  • Maximum Loan to Value

    FHA cash-out refinance loans have a maximum loan-to-value of 85 percent of the home's current value. The LTV ratio is calculated by dividing the loan amount requested by the property value determined in the appraisal.

  • Payment History Requirements

    Documentation is required to prove that the borrower has made all the monthly payments for the previous 12 months, or since the borrower obtained the loan, whichever is less. Mortgaged properties must have a minimum of 6 months of payments made before you are able to apply for a refinance. If you own your home free and clear, it may be refinanced as a cash-out transaction.

FHA Refinance Options for Homeowners

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FHA Loan Articles and Mortgage News

Buy or Refi a Home With an FHA Mortgage

December 15, 2018 - Do you qualify for a low down payment option on a new home purchase? Do you already own a home and have a mortgage but want to refinance? FHA mortgage loans offer these choices to house hunters and home owners alike regardless of whether you have owned property before or not.

Add an FHA Refinance Loan to Your Financial Plans

December 7, 2018 - Why do people refinance their mortgage loans? There are many reasons, but for those who prefer to do their financial planning with an eye on the future, refinancing can be a tool to eliminate certain kinds of debt, get a lower mortgage rate, or pull equity out of your home in cash.

Long-Term Planning and Your FHA Home Loan

December 5, 2018 - When you purchase a home with an FHA mortgage, are you already contemplating when you might sell or refinance? It may sound premature to some, but for those who prefer long-term financial planning a strategy for home ownership makes sense.

What to Do Before Refinancing

November 27, 2018 - Remember, it’s better to take longer to prepare for your refinance if you need to in order to fix things like payment history (a recommended 12 months of on-time payments for all bills) or correct identity theft issues on a credit report.

Frequently Asked Questions About Cash-Out Refinance Loans

November 20, 2018 - Do you know what to expect when you want to pull value out of your home in cash? Is there a difference between cash-out refinance loans in Texas and New York? How much money will you get in cash? These and other questions are important to answer in advance.

FHA.com Reviews

FHA.com is a one-stop resource for homebuyers who want to make the best decisions when it comes to their mortgage. With our detailed, mobile-friendly site, individuals can access information about different FHA products, the latest loan limits, and numerous other resources to make their homebuying experience easier. Take a look at some of the reviews from other FHA.com visitors!