The Quick Read: A lender builds your qualifying picture in a fixed order. It verifies the income that is likely to continue, adds up the debts that survive closing, and divides each total by your gross monthly income. The new loan payment goes into that math, not your old one. The base ratio pair is 31/43, and documented compensating factors can stretch it to 40/50 at the top tier, subject to lender guidelines and full file review.
Key Takeaways
- Income must be verified and likely to continue. A raise you haven’t received yet generally doesn’t count.
- Two ratios decide the file: housing (front-end) and total (back-end).
- Student loans count even when deferred or on a $0 plan, and some collections add a “phantom” monthly debt.
- Debts only drop out of the ratio if they are actually paid off at closing.
- The appraisal sets how much cash exists. Your income and debts decide whether you qualify for it.
What Is the Lender Actually Measuring?
The lender measures one thing: whether your gross monthly income can carry the new housing payment plus every other monthly obligation that survives closing. Everything else in the file feeds that comparison.
FHA cash-out estimate
Seeded with an example value, a balance to match, and a round cash request; change any field.
Editable benchmark: 7.32% as of October 22, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not an FHA cash-out refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $193,000 current balance, the FHA cap on a principal residence with the upfront premium financed, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
An illustration, not a Loan Estimate, an approval, a quote, or a commitment to lend. The rate shown is the weekly Freddie Mac thirty-year conventional benchmark, used as a market reference; an FHA cash-out is priced by the lender at lock, and this is not an FHA cash-out refinance quote. HUD’s cap limits the base loan; the upfront premium is financed on top of the capped base loan; the monthly premium for the first year follows the snapshot’s schedule. Cash available means the base loan the cap permits less the balances retired, before closing costs, which this calculator leaves out. The line figure applies the line program’s combined loan-to-value ceiling to the same value and balance. Taxes and insurance are estimates you can edit. Licensed in sixteen states for consumer mortgages.
An FHA cash-out replaces your current mortgage with a new, larger one. Across the wholesale programs Lendmire places FHA files with, the cash-out reaches 80% LTV on a home you’ve owned and occupied for 12 months before the case number. Lendmire’s FHA cash-out refinance program page covers the leverage and eligibility side. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.
Two gates come before any income math. The home must be your principal residence, and you need a clean recent mortgage payment history. Those are pass/fail. Income and debts are where the real variation lives.
How Does the Lender Define Income?
HUD calls qualifying income “Effective Income.” It must be verifiable and likely to continue. If a source of income can’t meet both tests, the lender leaves it out.
How each type of income is treated:
| Income type | What the lender looks at | Common trip-up |
|---|---|---|
| Salary | Current salary, if consistently earned | Future raises don’t count |
| Commission | At least two years in the same or similar work | Short history or declining pay |
| Disability | Award letter showing duration | Income ending within three years can’t count |
| Self-employment | Stable or increasing earnings | Declining earnings trigger extra analysis |
Salary is the simplest case. If you’ve earned it and it will likely continue, the lender uses today’s figure. A promotion that starts next month is generally not counted until it starts.
Commission, overtime and bonus income take longer to document. Expect the lender to ask for a history of that pay, usually about two years for variable income, and to question any gaps. Self-employed borrowers get the most scrutiny. A business that shows lower earnings than the year before prompts the lender to analyze why, and tax write-offs that shrink your reported income also shrink the figure the lender can use.
Disability benefits need an award letter. If the letter shows the benefit ending within three years of your application, it can’t count. If the letter has no end date, the lender may treat it as continuing. The HUD documents behind these points are the HUD Handbook 4000.1, with updates issued through HUD’s Mortgagee Letters.
What Income Can’t Be Used on a Cash-Out?
Some income that helps on a purchase does nothing on an FHA cash-out. Three examples come up constantly:
- A non-occupant co-borrower’s income. The person can be added to the loan, but their income can’t help you qualify on a cash-out.
- Rental income from an ADU. On a one-unit home with an accessory dwelling unit, that rent can’t be Effective Income on a cash-out.
- Cash you receive from the refinance. Proceeds are borrowed money, not income.
Lendmire’s piece How a Lender Counts Rental Income on a Cash-Out Refinance walks through the rental side in more detail.
(Plenty of borrowers learn this late. A parent co-signing a purchase is a common FHA move, but the same help doesn’t carry over to cash-out.)
How Does the Lender Count the New Housing Payment?
The lender counts the full new payment, not just principal and interest. That payment is larger than your old one because you’re borrowing more.
The housing payment in the ratio includes:
- Principal and interest on the new loan
- Property taxes
- Homeowners insurance
- FHA mortgage insurance
- Association dues, where they apply
On the mortgage insurance piece, the program carries an upfront premium of 1.75% of the base loan, which is financed, plus an annual premium between 0.15% and 0.75% of the balance depending on term, loan amount and LTV. Both are program facts, and the annual premium feeds the monthly payment the lender reviews your file on. On a thirty-year loan above 90% LTV, the annual premium lasts for the term. At or below 90%, it ends after eleven years. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.
This is why a cash-out can fail on income even when the borrower has made the old payment for years. The old payment is irrelevant. The new one is what gets divided into your income.
Which Debts Count and Which Don’t?
The lender counts the monthly payments on debts that remain after closing. Some debts count in ways borrowers don’t expect, and some drop out.
Student loans. Every student loan counts, whatever its payment status. Under HUD’s student loan rule, if the credit report shows a payment above zero, or you can document a payment, the lender uses it. If the reported payment is zero, the lender uses 0.5% of the outstanding balance. A loan documented as forgiven, canceled, discharged or paid in full can be excluded. A deferred loan or a $0 income-driven plan still produces a counted payment. A servicer letter showing your actual payment can matter here, because HUD requires written documentation when the payment used is lower than the credit-report figure.
Collections. Cumulative collection balances of $2,000 trigger a choice under HUD’s guidance. The lender can verify payoff, or document a payment arrangement and count that payment. If neither happens, the lender counts 5% of each collection’s balance as a monthly payment. A non-borrowing spouse’s collections in a community property state can count toward the total unless state law excludes them.
Nearly paid-off installment loans. Some may be excluded under conditions, which vary by lender. Don’t assume one qualifies, and don’t assume paying it down to get under a threshold will work. Lenders watch for that.
Debts missing from your credit report. If your application lists a debt the report doesn’t show, the lender has to consider it. Under the CFPB’s ability-to-repay guidance, the lender needn’t independently verify it, but it can’t pretend it isn’t there.
Known changes after closing. If the lender’s records show your income will change, such as a planned retirement or a move to part-time work, the lender has to consider that too.
What Are the Front-End and Back-End Ratios?
The front-end ratio is the new housing payment divided by gross monthly Effective Income. The back-end ratio is the housing payment plus all counted monthly debts, divided by the same income.
Gross means before taxes. That’s why a ratio can look fine against your take-home pay and still fail on paper.
The base pair is 31/43, housing over total, with no compensating factors. Documented compensating factors can reach 40/50 at the top tier. Typical examples are cash reserves and minimal payment shock, meaning the new payment isn’t much higher than what you pay now. HUD’s current ratio table in Mortgagee Letter 2026-11 repeats the 31/43 baseline, and shows a 33/45 stretch for energy-efficient homes.
Two points are often blurred:
1. 43% is a benchmark, not a ceiling. Higher ratios are allowed with strong scores and documented factors.
2. No federal 43% rule governs the file. The CFPB’s general ability-to-repay rule requires the lender to consider your DTI or residual income but sets no specific threshold. FHA’s own ratio table is what drives the decision.
How Does a Payoff at Closing Change the Math?
A payoff changes the ratio only if the payments you retire are larger than the payment you add. Run the order of operations the way a lender does.
Picture a borrower with a mortgage, a car loan, two credit cards and a student loan. The lender starts with the new, larger housing payment. It then adds the debts that survive closing. If the borrower pays off both cards and the car loan with the proceeds, those three payments drop out of the back-end ratio. The student loan stays in, counted at the documented payment or 0.5% of the balance.
The front-end ratio doesn’t move, because payoffs don’t touch the housing payment. Only the back-end ratio improves.
That produces a simple break-even test. If the new housing payment rises by more than the payments you retire, the back-end ratio gets worse, not better. Debt payoff works well when you’re retiring high-payment debts against a modest equity draw. It works poorly when you’re pulling a large amount of equity to retire a small balance.
One practical caution. Paying a debt at closing means the payoff must actually happen. A debt you intend to pay but don’t still counts. And converting unsecured debt into debt secured by your home lowers the monthly burden, but you now owe that money against your house.
Automated Review or Manual Underwriting?
Most files go through FHA’s TOTAL Mortgage Scorecard, which returns an Accept or a Refer. Scorecard has no single published maximum DTI. It weighs the whole file.
A Refer, or a file the scorecard can’t rate, goes to manual underwriting under the ratio matrix above. HUD’s rulemaking on manual underwriting explains when manual review is triggered and how compensating factors apply. In practice, that means a human underwriter reads the file, and your documented strengths carry more weight.
Individual lenders can also be stricter than HUD. Lenders call these overlays. They can raise a credit floor or tighten a ratio even when HUD would allow more. Lendmire’s piece How to Shop an FHA Cash-Out Across Lender Overlays explains why two lenders can read the same file differently.
Where Does the General Rule Break?
Edge cases are where borrowers get surprised. These are the main ones:
- Scores below 580. The wholesale programs Lendmire places FHA loans with start at 580. HUD’s lower tier exists, but the network doesn’t reach below 580. Under HUD’s matrix, borrowers with low scores stay at 31/43 with no compensating-factor relief.
- Multiple score models. A 2026 HUD mortgagee letter updates how the minimum decision credit score is set, so newer scoring models can be used alongside Classic FICO. Under the update, the lowest selected score per borrower will control the transaction. That applies to case numbers assigned on or after January 1, 2027, and existing score thresholds don’t change.
- Disputed derogatory accounts. Under older guidance, a disputed derogatory account could turn an automated Accept into a Refer. Treat this as a reason to resolve disputes before applying, not a current rule to rely on.
- Inherited homes. A borrower who inherited the property isn’t held to the standard occupancy period before a cash-out.
- Variable or declining income. A drop in last year’s earnings can pull the lender’s figure below what you expect.
Two things the ratio never decides. The appraisal sets the value, and the 80% LTV cap on that value sets your maximum loan. From that maximum come the payoff of your old mortgage, closing costs and the financed upfront premium, before any cash reaches you. You can pass on income and still get little or no cash if the appraisal comes in low. County loan limits apply too. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.
What Documents Prove Your Income and Payoffs?
Plan to gather these before you apply:
- Recent pay stubs and W-2s
- Two years of traditional personal-income documentation if you have variable or self-employment income
- Award letters for disability or other benefits
- A servicer letter showing your actual student loan payment
- A written explanation for any gaps in employment or income
- Payoff statements for any debts you plan to retire at closing
What If the Ratio Doesn’t Work?
When the number fails, you have options, and which one fits depends on your file.
1. Take less cash. A smaller loan means a smaller payment, which lowers both ratios.
2. Change the payoff list. Retire the debts with the largest monthly payments relative to their balance.
3. Resolve collections or arrange them. A documented payment arrangement or payoff changes the phantom 5% payment.
4. Document a compensating factor. Cash reserves and low payment shock can widen the ratio room, subject to lender guidelines.
5. Document your actual student loan payment. A servicer letter can replace the 0.5% placeholder.
6. Wait or choose another path. If the income isn’t there yet, a different program or a later application may be the better call.
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
Effective Income: HUD’s term for the income a lender may use to qualify you, verified and likely to continue.
Front-end ratio: The new total housing payment divided by gross monthly income.
Back-end ratio: The housing payment plus all counted monthly debts, divided by gross monthly income.
Compensating factor: A documented strength, such as cash reserves, that lets a file exceed the base ratios.
Manual underwriting: A human review of a file that automated scoring refers or can’t rate.
Overlay: A lender’s own rule that is stricter than HUD’s.
Frequently Asked Questions
Does the cash I take out count as income?
No. Cash-out proceeds are borrowed money, so they aren’t Effective Income. They can pay off debts, which removes those payments from the ratio, but only if the payoff happens at closing.
Can a co-signer’s income help me qualify?
Not on a cash-out. A non-occupant co-borrower can be added to the loan, but their income can’t be used to qualify. This differs from a purchase, where the same help is allowed.
Do I have to pay off collections before I apply?
Not always. Once cumulative collections reach $2,000, the lender can verify payoff, document a payment arrangement, or count 5% of each balance as a monthly payment. Handling them before you apply changes the ratio math, and individual lenders may be stricter.
Why would two lenders give me different answers?
Overlays and review type. HUD sets the floor, but a lender can set a stricter score or ratio. A file that gets an automated Accept at one lender may need manual review at another, depending on how each handles it. Every figure here is subject to lender guidelines and full file review.
Does a deferred student loan count against me?
Yes. Deferred and $0-payment loans still count, at a documented payment or 0.5% of the balance. A loan shown as forgiven, discharged or paid in full can be excluded with written proof.
Next Step
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.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. 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
2. HUD Mortgagee Letters index
3. HUD FHA Q&A: student loan payment
4. CFPB’s ability-to-repay guidance
5. HUD Mortgagee Letter 2026-11
6. HUD rulemaking on manual underwriting
This article is part of Lendmire’s FHA cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How Much Cash FHA and Conventional Loans Need to Close a Duplex · How to Lower Your Payment on a Fixed Income With an FHA Streamline · How Much Cash an FHA Loan Takes on Thinner Credit
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.