The Quick Read: FHA sets no dollar amount of debt a cash-out can clear. The limit is a ratio: your new total monthly debts, compared with your gross monthly income. Debts paid off at closing drop out of that ratio, but the bigger mortgage payment comes in first. A cash-out works when the payments you retire are larger than the payment you add. It stops when the new loan reaches 80% of the home’s value or the ratio lands above what the file can support.
What does “clearing debt” actually mean here?
Clearing debt means the lender pays your creditors directly from the loan proceeds at closing. Those monthly payments then leave your debt-to-income ratio. The ratio, usually called DTI, is your total monthly debt payments divided by your gross monthly income. Gross means before taxes.
Here is the part most borrowers miss. The new mortgage replaces your old one, so it is the biggest piece of the ratio. It is larger than the old loan, and it carries mortgage insurance, property taxes and homeowners insurance. Underwriters count that new housing payment first. Then they add the debts that survive closing.
So the question is never “how many dollars of debt can I roll in?” It is “after the payoffs, does the new total fit?”
The program Lendmire places files with through wholesale lenders is the FHA cash-out refinance program. It lets you refinance a home you own and live in, and take equity out as cash or as debt payoffs. Lendmire is a mortgage broker, so it arranges the loan rather than lending the money.
How the lender measures DTI on a cash-out, step by step
Underwriting follows a set order. Knowing it tells you where a file can break.
1. Eligibility gates. The home must be your principal residence. It must also be owned and lived in for 12 months before the case number is assigned. Your current mortgage payments need to be on time.
2. The appraisal sets the ceiling. Cash-out reaches up to 80% loan-to-value (LTV), which means the new loan can be no more than 80% of the home’s appraised value. That 80% covers everything: your old balance, the payoffs, closing costs and the financed upfront premium.
3. The new payment is counted. Principal and interest, taxes, homeowners insurance and FHA mortgage insurance all go into the housing side of the ratio.
4. Surviving debts are counted. Anything not paid off at closing stays in the back-end number.
5. The automated review runs. The lender’s system returns a finding. An approve-level result governs most files. A downgrade sends the file to manual underwriting, where the ratio tiers are stricter.
6. Payoffs are documented. The lender needs payoff statements for each debt being retired, plus proof of income, the appraisal and payment history.
Front-end, back-end, and the numbers FHA uses
Two ratios matter. The housing ratio (front-end) is your new housing payment divided by income. The total ratio (back-end) adds every other monthly debt.
Across the wholesale programs Lendmire works with, the base pair is 31/43. That means 31% for housing and 43% for total debt, with no compensating factors. Documented compensating factors can stretch that. Examples are strong reserves, a long and stable job history, or a modest payment increase over what you pay now. At the top tier the pair reaches 40/50. The automated finding governs most files, and FHA does not publish one single maximum that guarantees an approve result. Lenders can also set tighter limits than the program. All of it is subject to lender guidelines and full file review.
The basic FHA rules live in HUD’s Single Family Handbook 4000.1, which collects HUD’s policy in one place. HUD sets the program’s rules, and each lender applies its own overlays on top.
Here is a common misunderstanding worth clearing up. The federal ability-to-repay rule does not cap DTI at 43%. The CFPB’s own fact sheet says the rule does not mandate DTI ratios. It requires lenders to weigh your debts and income and use judgment. The 43% figure you hear everywhere is an FHA manual benchmark. Elsewhere it was a threshold for one category of qualified mortgage.
What clears at closing and what does not
Whether a debt leaves your ratio depends on its type and on whether the lender pays it off from proceeds.
| Debt type | Leaves the ratio at closing? | What to know |
|---|---|---|
| Credit cards | Yes, if paid off | Lender pays the creditor directly |
| Auto loan | Yes, if paid off | Payoff statement required |
| Personal loan | Yes, if paid off | Payoff statement required |
| Student loan | Yes, if paid off | A $0 reported payment can still count |
| Second lien or HELOC | Paid off or stays | Staying counts toward the 80% |
| Collections | Depends | Special rules apply |
Three of these can swing a file.
Student loans. If your credit report shows no required payment, such as on an income-driven plan, the lender usually counts a small percentage of the balance as your payment anyway. A zero reported payment does not mean zero in the ratio.
Collections. FHA has a cumulative threshold for non-medical collections. Once your total sits at or above it, the lender needs one of three things. That is proof the collections are paid, a payment arrangement, or a hypothetical payment of 5% of each balance counted in your DTI. HUD’s FHA Resource Center explains this. It also says a non-borrowing spouse’s collections can count in community-property states. The current wording sits in the Handbook, so your loan officer should confirm the exact threshold. Medical collections are generally treated more gently, but lenders differ.
Second liens. A HELOC or second mortgage that stays in place uses up room under the 80% cap. It adds none.
A worked before-and-after example (modeled, not a market fact)
These are modeled assumptions, expressed as shares of gross income. They show how the math runs, not what you will qualify for.
Say a borrower’s current housing payment is 28% of income. Credit cards, an auto loan and a personal loan add another 20%. That is a 48% total ratio, which sits above the 43% base.
| Step | Housing | Other debts | Total |
|---|---|---|---|
| Today | 28% | 20% | 48% |
| New loan, larger balance plus insurance | 34% | 20% | 54% |
| After paying off cards and personal loan | 34% | 4% | 38% |
The housing payment grew by six points. The payoffs removed sixteen. The total fell from 48% to 38%, inside the base 43%.
Now flip it. Same borrower, but the debts are mostly a student loan that stays and a collection that adds a hypothetical payment. The payoffs remove only five points, while the housing side still grows by six. The total lands at 49% or so, which needs strong compensating factors and an approve-level automated finding. That is a file that can stall.
The break-even question
Every cash-out has one test. Payments retired must exceed payment added. Measure both as shares of your income.
The test has a feedback loop. Each debt you roll in enlarges the loan. A larger loan raises the principal-and-interest payment and the mortgage insurance. It also uses up some of the 80% cap. So the last dollars of payoff are the most expensive ones in ratio terms.
That is why payment-to-balance matters more than balance alone. Credit card debt often has a high payment relative to its balance, so retiring it moves your ratio a lot per dollar borrowed. A car loan with a few payments left has a low balance but still carries a full monthly payment, so payoff can be efficient. A low-payment, long-balance debt gives you little ratio relief for what it adds to the new loan. Retiring that kind of debt may help your cash picture, but not your DTI.
Where the 80% cap limits you
The cap can stop the deal before DTI does. Here is the shape of it.
Take a home appraised at a certain value. The new loan can reach 80% of that value. From that room, subtract your existing first-mortgage balance, closing costs and the financed upfront premium of 1.75%. What remains is the most you can use for payoffs and cash to you. If your existing mortgage already uses most of the 80%, there is little left over for debt, regardless of what your ratio would allow.
HUD lowered the cash-out cap to its current 80% to reduce risk to the FHA insurance fund. Earlier caps were higher. Mortgagee Letter 2019-11 made the change, and HUD’s announcement explained the reasoning. If you read a page that says FHA cash-out goes to 85% or 95%, it is out of date.
County loan limits also apply. They change every year, so ask for your county’s current figure.
Compare this with purchase FHA, which reaches 96.5% financing with a 3.5% minimum investment at a decision score of 580 or higher. Cash-out is far tighter on leverage, and it is meant to be.
Scenario table: who clears, who is borderline, who stalls
All profiles are hypothetical. Real outcomes depend on the automated finding, the lender’s overlays and full file review.
| Profile | Debts being retired | Ratio result | Likely read |
|---|---|---|---|
| High card balances, no other debt | Most of the stack | Falls well below 43% | Clears |
| Cards plus auto loan, fair equity | Most payments | Lands between 43% and 50% | Borderline, needs compensating factors |
| Mostly student loans and collections | Few payments | Stays above 50% | Stalls |
| Little equity beyond the existing loan | Limited by the cap | Cap binds first | Stalls on LTV, not DTI |
A decision score at or above 580 is the starting point on the wholesale programs Lendmire works with. Some lenders set a higher floor. Below that, a cash-out generally is not available through that network.
If it still does not clear
A failed ratio is a diagnosis, not a dead end. These are the common fixes, each subject to lender guidelines:
- Retire a smaller set of debts. Pay off only the payments that move the ratio most, and leave the low-impact ones.
- Take a smaller cash-out. A smaller loan means a smaller added payment.
- Pay a few balances down from savings. This works when a debt is a few payments from done.
- Show reserves and stable income. Documented compensating factors are what raise the ceiling toward 40/50.
- Compare other products. A rate-and-term refinance on a principal residence reaches 97.75% LTV with an appraisal, and an FHA Streamline refinances an existing FHA loan without an appraisal. Neither one gives you cash, so they suit different goals. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.
What it costs beyond the ratio
Passing DTI is not the same as the loan being a good deal. Weigh these before you sign.
Mortgage insurance. The upfront premium is 1.75% of the base loan and is financed into the balance. The annual premium runs between 0.15% and 0.75% of the balance, depending on term, loan amount and LTV. On a thirty-year loan above 90% LTV, it lasts the full term. At or below 90%, it ends after eleven years. A cash-out that lands at 80% falls in the second group on those terms. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
A reset term. You are swapping short-term debt for a long one. A lower monthly payment can still mean more total cost over time.
Secured versus unsecured. This is the biggest tradeoff. Credit card debt is unsecured. Roll it into your mortgage and it becomes debt secured by your home. The CFPB’s research on cash-out refinances and paydown behavior notes that converting non-mortgage debt into mortgage debt can put the home at risk if payments become unsustainable. Missing a card payment is unlikely to cost you the house. Missing a mortgage payment can.
What borrowers do afterward. That same research found that paying off other debts was the most commonly selected reason for a cash-out. Card and auto balances fell after closing, while student loan balances were far less likely to. Balances that fall can climb again. If the cards fill back up, you carry both the bigger mortgage and new debt. Hold yourself to a plan before you close.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Key Terms Defined
DTI (debt-to-income ratio): your total monthly debt payments divided by your gross monthly income.
Front-end ratio: your housing payment, including mortgage insurance, taxes and homeowners insurance, divided by gross monthly income.
Back-end ratio: all monthly debts, housing included, divided by gross monthly income.
LTV (loan-to-value): the loan amount as a percentage of the home’s appraised value.
Compensating factors: documented strengths, like reserves or stable employment, that let a lender accept a higher ratio.
Automated underwriting: the lender’s system that scores your file and returns an approve-level or refer-level finding.
Payoff at closing: the title company sends loan proceeds directly to a creditor to retire a debt.
Where to go from here
Start with your income and your list of monthly debts. Put each payment next to its balance. The payments that are large compared to their balances are the ones a cash-out clears best. Then ask what share of the 80% cap your current mortgage already uses.
If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches. Everything above is subject to lender guidelines and full file review, and none of it is a commitment to lend.
Frequently Asked Questions
Is there a maximum DTI for an FHA cash-out?
No single number guarantees an approval. The base pair is 31/43, and documented compensating factors can raise it toward 40/50 at the top tier. An approve-level automated finding often governs, and lenders may set tighter limits than the program. Treat any “up to” figure from a blog as unverified until a lender confirms it on your file.
Do debts paid off at closing still count in my DTI?
No. Debts the lender pays from your proceeds leave the back-end ratio. The larger new mortgage payment replaces your old housing payment in the ratio, so the net effect depends on which payments you retire. Installment debts need payoff statements, and funds must come from an acceptable source.
Can I roll collections into the loan?
Often yes, but collections have their own rules. Above a cumulative threshold, FHA requires proof of payoff, a payment arrangement, or a hypothetical payment of 5% of each balance in your ratio. Medical collections are generally treated more gently, though lender practice varies. Confirm the current threshold in the Handbook.
Does a $0 student-loan payment count as nothing?
Not generally. When the credit report shows no payment, the lender usually counts a small percentage of the balance. That can affect the ratio even when you owe nothing today. Paying the student loan off at closing removes it entirely.
How much can I borrow on an FHA cash-out?
Up to 80% of the home’s appraised value, with county loan limits applying. That amount has to cover your existing mortgage, closing costs, the financed upfront premium and any debts you pay off. What is left is your cash. Keeping a second lien in place uses part of that room.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage broker licensed for consumer lending in 16 states. Lendmire arranges FHA, VA, conventional and jumbo purchase and refinance loans through wholesale lenders; every file is underwritten by the lender under the applicable program guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
For the program’s current guidelines, see FHA loan programs.
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References
1. HUD Single Family Handbook 4000.1
2. CFPB: ability-to-repay rule fact vs. fiction
3. HUD FHA Resource Center: collections and FHA eligibility
4. HUD Mortgagee Letter 2019-11
5. HUD press release on the cash-out cap
6. CFPB: cash-out refinances and paydown behavior of non-mortgage debt
This article is part of Lendmire’s FHA Loan series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: FHA Cash-Out Credit Requirements for Debt Consolidation at High DTI · Can You Consolidate Debt With a High DTI on an FHA Cash-Out? · How to Document a Manual FHA Cash-Out to Consolidate Debt at High DTI
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.