FHA Cash-Out Refinance Requirements When Paying Off a HELOC

The Quick Read: An FHA cash-out refinance can pay off a HELOC, because the new first mortgage replaces both the old first loan and the credit line at closing. The HELOC has to be paid off and closed so the new loan sits in first position. The home must be your principal residence, owned and lived in for 12 months before the case number, and the loan generally tops out at 80% of the home’s adjusted value. Whether the payoff counts as “cash-out” at all depends on how recently you drew on the line.

Can an FHA Cash-Out Refinance Pay Off a HELOC?

Yes. A HELOC is a second lien, meaning a claim on your home that ranks behind the first mortgage. A new FHA loan has to be the first lien. So the old first mortgage and the HELOC are both paid off from the new loan’s proceeds, and the title company sends the payoff to each lender at closing.

Here is the part people miss. The HELOC is not just a bill to settle. It is a lien that has to be released. After closing, the line must be closed and the release recorded. Keeping it open and asking its lender to stay behind the new loan is not the usual route on a cash-out.

Lendmire’s FHA cash-out refinance program page lays out the program basics. Lendmire is a mortgage broker, so it arranges these loans through wholesale lenders rather than lending directly.

Is a HELOC Payoff “Cash-Out” or “Rate-and-Term”?

It depends on the draw history. A rate-and-term refinance is a no-cash-out loan: all proceeds go to paying existing liens on the home plus closing costs. A cash-out loan is anything where proceeds are not limited to that.

HUD’s Handbook has a test for equity lines. Generally, if more than a small amount of the line was advanced in the past 12 months for something other than repairs, that excess can’t be rolled into a no-cash-out loan. That pushes the deal toward cash-out rules. The exact threshold is small, and your underwriter should confirm the current Handbook wording, since HUD updates it periodically. The Handbook lives on HUD’s Handbook 4000.1 page.

In practice, three pictures come up:

• A line drawn years ago, or used for repairs. Often treated as a no-cash-out payoff.
• A line drawn recently for a car, a vacation or debt. Usually pushes the loan into cash-out treatment.
• A line with a balance you never drew on recently. The lender reviews the statement history to decide.

Why does the label matter? Rate-and-term FHA refinances on a principal residence reach 97.75% LTV when you have lived there for the previous twelve months. Cash-out stops at 80%. That gap is the whole reason to know which bucket you land in. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.

What Are the FHA Cash-Out Requirements?

Across the wholesale programs Lendmire places FHA files with, the cash-out basics look like this. Subject to lender guidelines:

Three of these deserve a closer look.

Occupancy. Standard FHA cash-out is for the home you live in. There is no standard cash-out on a second home or a rental. Occupancy decides the leverage, and FHA cash-out reaches only primary homes.

Ownership clock. At least one borrower must have owned and lived in the home for the 12 months before the case number is assigned. Inherited homes are the named exception: there is no minimum occupancy period, provided you have not treated the property as an investment since inheriting it. If you rent it out after inheriting, the 12-month clock starts over.

Credit and ratios. The wholesale lenders Lendmire works with start at a 580 decision score. HUD itself has a lower tier, but the network does not reach below 580. The base debt-to-income pair is 31/43, meaning housing costs at 31% of income and total debts at 43%. Documented compensating factors, such as reserves or a strong payment record, can stretch that to 40/50 at the top tier. The automated underwriting finding governs most files. If you have had a bankruptcy or foreclosure, HUD’s waiting periods are two years from a chapter 7 discharge and three years from a foreclosure. Those are HUD rules, not a promise from any lender.

How the HELOC Payoff Fits Under the 80% Cap

This is where cash-out files get tight. HUD cut the FHA cash-out maximum from 85% to 80% of adjusted value, effective for case numbers assigned on or after September 1, 2019, per HUD Mortgagee Letter 2019-11. HUD’s announcement described the change as lowering the cap from 85 to 80 percent.

The cap applies to both LTV and combined LTV (CLTV). Combined means every lien counts. Your new FHA loan plus any HELOC left standing must fit under 80%. That is why paying the line off and closing it is the standard approach.

Run it as a thought exercise. Say your home appraises at a round number, and your first mortgage and HELOC together use up 70% of it. The new loan can reach 80%, so roughly a tenth of the value is left. Out of that tenth, subtract closing costs and the financed upfront mortgage insurance premium. What remains is your cash. If the first mortgage and HELOC together already sit near 80%, there is little or nothing left, and the refinance may not make sense.

Notice what that does to expectations. Paying off a HELOC “from the proceeds” does not create extra cash. It uses up equity you already had. Borrowers often expect a check and get a smaller one, or none.

What Happens to Your Monthly Budget?

Two payments become one. That is the appeal. A HELOC is typically variable, and many have a draw period that ends and rolls into repayment. The CFPB’s HELOC brochure explains that a repayment period can even end in a balloon payment. Folding the line into a fixed first mortgage removes that surprise.

The cost side is just as real:

• You replace your whole first mortgage. If your current first loan has terms you like, you lose them. That is usually the biggest question on the page.
• Mortgage insurance applies. FHA charges an upfront premium of 1.75% of the base loan, which is financed. It also charges an annual premium between 0.15% and 0.75% of the balance, depending on term, loan amount and LTV. On a thirty-year loan above 90% LTV, the annual premium lasts for the loan’s term. At or below 90%, it ends after eleven years. Cash-out loans cap at 80%, so the eleven-year rule is the one that normally applies here.
• Closing costs reduce your net cash. They come out of proceeds or add to the balance.
• Debt-to-income shifts. The HELOC payment drops out of your ratios, but a larger first-mortgage payment, including mortgage insurance, goes in. Net, your ratios may go up or down.

Pay Off, Subordinate, or Keep the HELOC?

You have a few options. Here is how they compare.

Subordination means the HELOC lender signs an agreement to stay behind the new first loan. It is common in conventional refinances. On an FHA cash-out, the combined cap makes it a poor fit, since the line’s balance still counts. Do not assume FHA mirrors the conventional answer. Freddie Mac’s Guide, for example, addresses HELOC payoffs on conventional loans under its own treatment. Programs differ.

Where the General Rule Breaks

Some situations change the answer:

• Home owned less than 12 months. Standard cash-out is generally off the table, unless the inheritance exception applies. Properties acquired within 12 months also get stricter valuation treatment, with an as-is appraisal.
• Rented after inheriting. The 12-month occupancy clock restarts.
• Free-and-clear homes. The Handbook allows cash-out on a home with no mortgage. Do not assume a shortened waiting period; confirm with your lender.
• FHA Streamline. The Streamline refinances an existing FHA loan with no appraisal, limited credit review and a net tangible benefit. It cannot put cash in your pocket, so it does not take out a HELOC for cash.
• Rentals and second homes. Occupancy decides the leverage, and FHA cash-out is for primary residences.
• Hawaiian Home Lands. HUD’s 80% change does not apply to Section 247 mortgages.

A broker’s observation from placing these files: the deals that stall are rarely about credit. They are about the HELOC. A line drawn last spring, a payoff statement that does not match the lien, or a HELOC lender slow to release the lien after payoff can each hold up a file. Pull your HELOC statements for the past 12 months before you apply, and know what each draw paid for.

Step by Step: How the Loan Is Worked

1. Case number and eligibility. Occupancy and ownership are measured back from the case number date. The lender verifies you live there.

2. Payment history. Lenders review your mortgage payment history. Late payments can reshape or block the loan.

3. Appraisal. The appraisal sets adjusted value, which the 80% cap is measured against.

4. HELOC review. The underwriter reviews 12 months of draws and what they paid for. This is the classification step.

5. Loan sizing. The base loan is capped at 80% of adjusted value, counting every lien.

6. Payoff. The title company pays off the first mortgage and the HELOC from a payoff statement. The line is closed, and the lien release is recorded so the FHA loan is in first position.

7. Closing and cancel period. Because this is a refinance of your primary home, you generally have three business days to cancel. The CFPB notes that rescinding does not cancel your original loan. Funds generally are not released until the period ends.

You will receive a Loan Estimate and a Closing Disclosure along the way, and you should compare them line by line.

Key Terms Defined

HELOC: A home equity line of credit, a revolving loan secured by your home, usually with a variable payment.

Cash-out refinance: A new mortgage where proceeds are not limited to paying off existing debt and closing costs.

Rate-and-term refinance: A no-cash-out refinance where proceeds only pay off liens on the home and the costs of the loan.

CLTV: Combined loan-to-value, the total of all liens on the home divided by its adjusted value.

Adjusted value: The appraised value figure FHA uses to measure its loan-to-value limits.

Subordination: An agreement where a lender lets its lien rank behind a new first mortgage.

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 serving homeowners and home buyers in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending channels; Lendmire brokers the financing and the lender underwrites each application. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. HUD Handbook 4000.1 information page

2. HUD Mortgagee Letter 2019-11

3. HUD press release 19-114

4. CFPB HELOC brochure

5. Freddie Mac Guide 4301.4

6. CFPB: right of rescission