The Quick Read: On an FHA cash-out refinance, rental income helps only when it is documented, stable, and not excluded by HUD. Rent from a separate property you own can raise your qualifying income. Rent from an accessory dwelling unit (ADU) on the home you are refinancing cannot be used on a cash-out. Rent from the other units of a two-to-four unit home is a case to confirm with the lender, not to assume. Even with rent used for lender review, the new loan stops at 80% of the home’s adjusted value.
Key Takeaways
- Standard FHA cash-out is for a home you own and live in as your principal residence. It is not for a rental you do not occupy.
- Rent from an ADU on the subject property is excluded as income on a cash-out.
- Rental income that does count is averaged from tax returns or built from a lease and an appraiser’s market rent, then reduced for vacancy and costs.
- A high-DTI file is judged against ratio tiers. Documented compensating factors can move a borrower up through those tiers.
- Cash you take out at settlement does not count as reserves.
What Is an FHA Cash-Out Refinance?
It is a new FHA-insured mortgage that replaces your current loan and pays you the difference in cash. Across the wholesale programs we place files with, the FHA cash-out reaches 80% loan-to-value on a home you have owned and lived in for 12 months before the case number is assigned.
FHA cash-out estimate
Seeded with an example value, a balance to match, and a round cash request; change any field.
Editable benchmark: 7.18% as of November 5, 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.
That 80% cap is a HUD rule. HUD Mortgagee Letter 2019-11 set the maximum loan-to-value and combined loan-to-value for cash-out refinances at 80% of adjusted value. HUD’s own announcement of the change describes it as a move down from 85%. Your credit score does not raise that ceiling. Score affects the ratio tiers you can reach, not the leverage.
How Does the Lender Underwrite the Loan, Step by Step?
The lender works through the same sequence on nearly every file. Rental income only enters at step three.
1. Eligibility. The home must be your principal residence, and you must have owned and occupied it for the 12 months before the case number. Lenders typically evidence occupancy with employment records or utility bills. A non-occupant co-borrower’s income cannot be used to qualify for a cash-out.
2. Maximum loan. The new balance is capped at 80% of adjusted value, so the appraisal sets the ceiling on cash.
3. Income build. The lender starts with your effective income from wages and other documented sources, then adds any rental income that qualifies.
4. Debt side. The lender adds the new housing payment, which includes FHA mortgage insurance, plus your other monthly debts. Negative net rent on another property is counted as a liability.
5. Ratio test. An automated finding comes first. If it comes back as a refer, or the file is manually underwritten, the lender applies the ratio tiers below.
6. Review. The lender confirms income, assets, employment, credit, and monthly expenses. That reflects the CFPB’s ability-to-repay rule, which requires a good-faith determination that you can repay.
Everything here is subject to lender guidelines and full file review. Nothing is a commitment to lend.
Which Rental Income Counts, and Which Does Not?
Rent from another property you own can count. Rent from an ADU on the home you are cashing out cannot. That split is where most confusion starts, because many pages blend purchase rules with cash-out rules.
| Income type | FHA cash-out | Why |
|---|---|---|
| Rent from a separate property you own | Can count, if documented | Positive net rent adds to income |
| Negative net rent on another property | Counts against you | Treated as a liability |
| ADU rent on the subject home | Excluded | HUD carve-out for cash-out |
| Rent from other units in a 2–4 unit home | Confirm with lender | Treatment on cash-out should be verified |
| Non-occupant co-borrower’s income | Excluded | Cash-out requires occupant income |
| Boarder income | Needs history | Two-year tax history and a current lease |
HUD’s Mortgagee Letter 2023-17 states that ADU rent cannot be effective income on a cash-out refinance. The same letter set out how rental income is calculated more broadly. On a purchase, ADU rent can sometimes help. On a cash-out, it cannot. Do not plan a high-DTI strategy around a basement or garage unit on the home you are refinancing.
How Does the Lender Calculate the Rent That Does Count?
Rent with a tax history. When the property has been rented long enough to show on your returns, the lender averages the net rental figure from Schedule E. Net means after expenses, with depreciation added back where allowed. If the result is positive, it is added to your income. If it is negative, it becomes a monthly liability.
Rent with limited or no history. HUD’s 2023-17 letter describes using 75% of the lesser of the appraiser’s market rent or the lease rent. The 75% haircut stands in for vacancy and upkeep. The appraiser documents market rent on a rent schedule form. Confirm with your loan officer how this method applies to a cash-out on your file, since it is written for rental income generally.
So a lease showing strong rent does not carry the full figure into your income. The lender takes the lower number, then reduces it again. Assuming that all of your rent counts will overstate your qualifying income.
How Do the Ratio Tiers Work for a High-DTI Borrower?
FHA uses two ratios: housing payment to income, and total debts to income. Across the programs we place, the base pair is 31/43 with no compensating factors, and documented factors can reach 40/50 at the top tier.
For manually underwritten loans, HUD’s published matrix works like this:
| Decision credit score | Ratio tier | Compensating factors |
|---|---|---|
| Under 580 or no score | 31/43 | None allowed |
| 580 and above | 31/43 | None needed |
| 580 and above | 37/47 | One factor |
| 580 and above | 40/50 | Two factors |
The wholesale programs Lendmire places FHA loans with start at a 580 decision score. The sub-580 tier is a HUD rule our network does not reach. Because of that, a high-DTI borrower in our lane is working inside the 580-and-up rows.
Acceptable compensating factors include verified cash reserves, a minimal increase in housing payment, residual income, and significant additional income not reflected in effective income. HUD limits that last factor to the 40/50 tier. HUD also publishes a fuller set of manual-underwriting rules in its handbook, and the lender applies whatever is current. One recent HUD letter touched the ratio and credit-score sections, so ask your loan officer which version governs your file.
One catch matters here. Reserves do not include the cash you receive at settlement on a cash-out. A borrower who hopes to use the equity pulled out as the reserve cushion needs other verified funds instead.
What Does Counting Rent Look Like in Practice?
Consider three borrowers, described in plain terms without dollar figures.
Borrower one owns a second house that is rented and shows on two years of returns. The Schedule E average is positive. That net amount is added to income, and the back-end ratio drops. Depending on how far it falls, the file may move from needing two compensating factors to needing one. That is the realistic best case for rent helping a high-DTI file.
Borrower two owns a rental that nets to a loss on the returns. The loss counts as a monthly liability. Adding the rental makes the ratio worse, not better. For this borrower, selling the property or paying down its debt may help more than any income calculation.
Borrower three lives in a one-unit home with a rented ADU. The ADU rent is excluded on the cash-out. The ratios are built from the borrower’s wages and other eligible income only. If the numbers fall short, the answer is fewer debts, a smaller loan, or a different program.
Rent is only one lever, and it carries a discount. Paying off a revolving balance or an installment loan can do more, because it removes a payment from the debt side instead of adding a discounted figure to the income side. Ask the lender to run both versions so you can see which change moves the ratio most.
Where Does the General Rule Break?
A few edge cases trip borrowers up.
- Two-to-four unit owner-occupied homes. If you live in one unit and rent the others, do not assume that rent counts. HUD’s cash-out treatment for this setup is the point to confirm against the current handbook before you count on it.
- Inherited home that was rented. If you then move in, you need to have owned and occupied the home for 12 months before the case number to qualify for a cash-out.
- Occupancy lost. Renting out the home resets the 12-month occupancy clock, which is measured back from the case number date.
- No existing mortgage. Taking equity out of a home with no loan still counts as a cash-out, according to HUD’s handbook update index.
- Investment property or second home. Standard FHA cash-out is not available. Occupancy decides the leverage, and a rental you do not live in sits outside this program.
- Credit events. HUD’s waiting periods apply: two years from a chapter 7 discharge and three years from a foreclosure. Those are HUD rules, not a promise from any lender.
What Should a High-DTI Borrower Do Before Applying?
Work the levers in order of impact.
1. Pay off or pay down debts. Removing a monthly payment helps the debt side directly.
2. Borrow less. A smaller cash-out means a smaller new payment, which lowers both ratios.
3. Document any eligible rent. Gather two years of returns with Schedule E, current leases, and the appraisal rent schedule.
4. Build compensating factors. Verified reserves other than the settlement cash, a small increase in housing payment, and residual income all count.
5. Add occupant income. A co-borrower who lives in the home can contribute. One who does not, cannot.
Your paperwork should include proof of occupancy such as utility bills or employment records, recent pay documentation, and mortgage statements for every property. If the file still falls short, the choices are a smaller cash-out, a different program, or waiting until the ratios improve.
What About FHA Mortgage Insurance?
Every FHA cash-out carries mortgage insurance, and it sits inside the housing payment the lender tests. The upfront premium is 1.75% of the base loan and is typically financed. 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, the annual premium lasts for the term. At or below 90% LTV, it ends after eleven years. Because a cash-out tops out at 80%, the lower-LTV schedule is the one that usually applies. Premiums are program facts, not quoted prices, and county loan limits apply to the loan amount.
Key Terms Defined
Effective income: The monthly income a lender counts after verifying and adjusting it, including any eligible rent.
Debt-to-income ratio (DTI): Your monthly debts divided by your monthly income, tested as a housing ratio and a total ratio.
Accessory dwelling unit (ADU): A secondary living space on the same property as the main home, such as a garage apartment.
Adjusted value: The appraised value used to set the maximum loan, from which the 80% cap is figured.
Compensating factor: A documented strength, such as reserves, that lets a lender approve a higher ratio tier.
Schedule E: The tax form where rental income and expenses are reported.
Frequently Asked Questions
Can I use rent from my own ADU to qualify for an FHA cash-out?
No. HUD excludes ADU rent as effective income on a cash-out refinance. It can sometimes help on a purchase, but that does not carry over. Qualify on your wages and other eligible income, or pick a different program.
Does rent from a second house I own help my DTI?
It can, if the rent is documented and nets positive. The lender averages Schedule E or uses a discounted lease-and-market-rent method. If the property nets to a loss, the loss counts as a debt and can push your ratio higher.
Can a co-borrower who does not live with me help me qualify?
Not on a cash-out. A non-occupant co-borrower’s income cannot be used to qualify. A co-borrower who lives in the home can contribute income.
How much cash can I take out?
The new loan can reach 80% of adjusted value, and your payoff and costs come out of that. Credit score does not raise the cap. County loan limits also apply to the loan amount.
Is there a hard 43% DTI limit on FHA?
No. 31/43 is the base pair. Documented compensating factors move the tiers up to 40/50, and automated findings can approve some files outside the manual matrix. All of it is subject to lender guidelines and full review.
Your Next Step
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
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 broker that arranges FHA, VA, conventional and jumbo home purchase and refinance financing in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. HUD Mortgagee Letter 2019-11
2. HUD announcement on cash-out LTV change
3. CFPB’s ability-to-repay rule
4. HUD Mortgagee Letter 2023-17
5. HUD FHA Q&A: Maximum qualifying ratios for manually underwritten loans
6. HUD Handbook 4000.1 Update 15 index
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: Does an FHA Cash-Out Refinance Make Sense to Fund Renovations With a Higher DTI? · Is an FHA Cash-Out Easier Than Conventional on Credit and DTI? · FHA Cash-Out Refinance Requirements for a Retiree Living on Retirement Income
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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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.