The Quick Read: On an FHA cash-out refinance, a co-borrower who does not live in the home cannot help you qualify, because that person’s income does not count toward the loan. The borrower who lives there has to carry the file alone, on their own income, credit and assets. A relative can share legal responsibility for the debt, but cannot lend you a paycheck. Leverage also tops out at 80% of the home’s value whoever is on the note.
What does an FHA cash-out refinance require?
An FHA cash-out replaces your current mortgage with a larger one and hands you the difference. The program reaches 80% LTV (loan-to-value) on a home you have owned and occupied for 12 months before the case number is assigned. It is for a principal residence only. That means a home where at least one borrower lives. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.
Across the wholesale programs Lendmire places FHA files with, this occupancy test is where non-occupant questions usually surface. People know FHA purchase loans are friendly to a parent or relative who co-signs. They assume the same help carries over to a cash-out. It does not.
For the full picture of the loan itself, see Lendmire’s FHA cash-out refinance program page. Every figure here is subject to lender guidelines and full file review, and nothing here is a commitment to lend.
Here is the contrast that matters most:
| Transaction | Non-occupant help with qualifying? |
|---|---|
| FHA purchase | Allowed, with conditions |
| FHA rate-and-term refinance | Lender-dependent; check the program sheet |
| FHA cash-out refinance | Their income does not count |
What counts as a non-occupant co-borrower?
A non-occupant co-borrower is someone who signs the loan but does not live in the home. Three roles get blurred, so it helps to separate them:
- Occupant co-borrower: on the loan, lives in the home, and their income counts.
- Non-occupant co-borrower: on the loan, does not live in the home.
- Co-signer: on the note but not on the title, with no ownership interest. Some programs treat this as a different role.
The distinction between co-borrower and co-signer is about title. It does not change the cash-out income rule. Either way, the person who does not live there adds liability to the file, not qualifying strength.
Where does the income rule come from?
The rule is in HUD’s Handbook 4000.1, the document that governs FHA lending. HUD Mortgagee Letter 2023-17 reproduces the language: income from a non-occupant co-borrower may not be used to qualify for a cash-out refinance. The same letter applies the requirement to loans run through the automated TOTAL Scorecard and to manually underwritten loans, so underwriting method typically doesn’t offer a way around it. Check the current text on HUD’s Handbook 4000.1 page, since handbook language gets revised.
HUD’s own glossary defines a Non-Occupant Borrower as a borrower on a mortgage securing a property that no borrower occupies as a principal residence.
Two things the rule does not say:
1. It restricts the use of the person’s income. It does not, on its face, ban them from the loan. Whether a particular lender will let a non-occupant sit on a cash-out at all is an overlay question. Some lenders allow it with the income excluded. Others decline the combination. Program availability depends on the lender.
2. It does not stop the occupant from qualifying on their own. If the occupant’s income supports the new, larger balance, the loan can proceed on that basis.
Lenders commonly still count the co-borrower’s liabilities in the debt ratios, while the income is left out. That is a lender practice, and your loan officer should confirm how it works on your file. If it applies, adding someone can leave you worse off than before.
How is the loan underwritten, step by step?
Here is how a cash-out file moves when a relative is in the picture.
Step 1: The occupant clears the cash-out gates. The home must have been owned and occupied for 12 months before the case number. Lenders also look at your mortgage payment history on the current loan. An heir living in an inherited home may be exempt from the minimum occupancy period, as long as the home was not treated as an investment property since the inheritance. Confirm the exact language in the handbook.
Step 2: Title is checked. At least one borrower on the new loan must already hold title to the property before the case number is assigned. A person who is only a co-signer on the old note does not meet that on their own.
Step 3: The household income is tested. Here the ratio framework applies. Most FHA files use a 31/43 base pair, meaning housing costs of 31% of income and total debts of 43%. Documented compensating factors can stretch that to 40/50 at the top tier, and the automated finding governs most files. Only the occupant’s income goes into the numerator.
Step 4: The credit decision. The wholesale programs Lendmire works with start at a 580 decision score for FHA, though lenders set their own overlays. The same score logic applies to every borrower on the file. A weaker score from a non-occupant can still drag the file down.
Step 5: The appraisal sets the ceiling. A cash-out needs a full appraisal. The new loan is capped at 80% of the adjusted value, and any other liens that stay on the property count toward that cap. County loan limits apply as a separate ceiling.
Step 6: Closing. Everyone on the loan generally takes title and signs the security instrument. That includes a non-occupant, who becomes an owner on paper whether or not they ever live there.
HUD’s press release on the cash-out change lowered the cap on FHA cash-out loans to 80%, in line with the conventional market. Older articles that quote a higher cap are out of date.
Which situations change the answer?
Most real files are a variation on a few themes. The table below shows what generally happens, though lender overlays vary.
| Situation | What generally happens |
|---|---|
| Add a new non-occupant | Income excluded; liability added |
| Parent co-signed original loan | Occupant must qualify alone on the new loan |
| Remove the non-occupant | Occupant qualifies alone; refinance is the route |
| Relative moves in | Income may count once they truly occupy |
| Heir lives in inherited home | May be exempt from occupancy wait |
| Heir does not live there | Not an occupant; cash-out is off the table |
Take a few of these in more detail.
The parent who co-signed the original purchase. Suppose you bought with a parent’s help, and the parent never lived there. When you refinance for cash, expect the lender to ask whether you can carry the new balance alone. If you cannot, the parent’s income does not fix that. Some lenders will not keep a non-occupant on a cash-out loan at all.
The relative who moves in. This one is tempting. If the person truly moves in and the home becomes their principal residence, they are no longer a non-occupant. But intent to move in later does not satisfy the occupancy requirement, and the timing against the 12-month test gets scrutinized. Plan around the clock, not around the paperwork.
The inherited home. The heir who lives there has more flexibility than a typical owner. The heir who does not live there is not an occupant, and a cash-out is not available to them on a principal-residence program.
The backyard unit. One more trap: rental income from an accessory dwelling unit on a one-unit property cannot be used as qualifying income on an FHA cash-out either, per the same HUD letter. So a household cannot swap the missing co-borrower income for backyard rent.
State rules can also cap what you can borrow. Lendmire’s piece FHA Cash-Out Requirements When Texas Homestead Rules Cap the Loan shows how that works in one state. For the question here asked in a shorter form, see Lendmire’s article Can a Non-Occupant Co-Borrower Be Added to an FHA Cash-Out?.
What does the decision look like in practice?
Run the decision in this order.
1. Test the occupant alone. Before you pay for an appraisal, ask whether the household income of the people who live there supports the new, larger balance. If it does, a co-borrower is unnecessary. If it does not, adding one will not change that.
2. Check the equity. With an 80% cap, you keep roughly a fifth of the home’s value after closing. That is a smaller cushion if values drop.
3. Look at the monthly picture. A cash-out replaces your loan with a bigger one, so the monthly obligation generally rises. FHA mortgage insurance applies to the whole new balance, not just the cash you take out. The upfront premium is 1.75% of the base loan and can be financed. The annual premium runs between 0.15% and 0.75% of the balance, depending on term, loan amount and LTV. At 80% LTV on a thirty-year loan, the annual premium generally ends after eleven years.
4. Weigh what the relative takes on. The CFPB explains that a co-borrower agrees to take full responsibility for repaying the mortgage with you. They are obligated for missed payments and even the full loan amount if you do not pay. The loan can show up in their credit and debt picture, and getting them off later generally takes a refinance.
If the numbers do not work with the occupant alone, you have options short of adding someone. You could wait until income or credit improves. You could look at a different loan type with a different equity cap. Or you could consider a second lien. Each of those has trade-offs, and a broker can compare them against your goals.
Common mistakes
- Assuming purchase rules carry over. Purchase loans allow non-occupant help with conditions. A cash-out does not allow it for income.
- Counting on backyard-unit rent to fill the gap. HUD excludes it.
- Treating a co-signer as a backup, not an owner. A co-borrower is fully liable.
- Quoting an old leverage cap. The current cash-out cap is 80%.
- Paying for an appraisal before a qualification check. Test the occupant’s numbers first.
Key Terms Defined
Cash-out refinance: A new mortgage that pays off your current one and gives you the leftover equity in cash.
Non-occupant co-borrower: Someone on the loan who does not live in the home as a principal residence.
Co-signer: A person on the note but not on the title, with no ownership interest in some programs.
LTV (loan-to-value): The loan balance as a percentage of the home’s appraised value.
Mortgage insurance premium: The FHA charge that protects the lender, paid once upfront and then yearly on the balance.
Principal residence: The home where a borrower lives as their main home.
Next steps
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. Reach the team at 828-256-2183 or request a quote through the Lendmire quote page.
Frequently Asked Questions
Can my parent co-sign to help me qualify for an FHA cash-out?
Not in the way you may be hoping. A parent who does not live in the home can sign, but HUD does not let their income count toward the cash-out. You still have to qualify on your own income, and some lenders will not allow a non-occupant on a cash-out at all.
Does it matter if the co-borrower was already on my original loan?
It can, because lenders look at the new loan fresh. A person who was fine on a purchase may be limited on a cash-out. Expect the occupant to carry the file alone, and ask your loan officer how a given lender handles an existing non-occupant.
What if my relative moves into the home?
Once they truly occupy it as their principal residence, they are no longer a non-occupant, and their income may be considered. Lenders pay close attention to timing, and the 12-month ownership and occupancy test still applies to the cash-out. Moving in on paper only does not count.
Is an FHA rate-and-term refinance different?
Yes. The income exclusion is specific to cash-out. A rate-and-term refinance follows different rules and can reach up to 97.75% on a principal residence occupied for the previous twelve months. Whether a non-occupant can help there depends on the lender.
Can I take out more than 80% of my home’s value?
No, not on an FHA cash-out. The new loan, combined with any other liens that stay, is capped at 80% of the property’s adjusted value. County loan limits apply on top of that.
About Lendmire
As a mortgage broker (NMLS# 2371349), Lendmire helps homeowners and home buyers in 16 states with FHA, VA, conventional and jumbo purchase and refinance loans arranged through wholesale lenders. Lendmire is never the lender; program terms are set by the lender and the agency 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 Mortgagee Letter 2023-17
3. HUD Handbook 4000.1 Glossary
4. HUD press release on the FHA cash-out LTV reduction
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 Requirements for a Condo Project Not yet Approved · How to Get an FHA Cash-Out After a Quitclaim From a Parent · FHA Cash-Out Requirements vs What an FHA Streamline Allows
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.