The Quick Read: An FHA cash-out refinance can pay off credit cards, car loans, and similar debts straight from the loan proceeds at the closing table. The new loan can reach up to 80% of the home’s appraised value, and the debts it pays drop out of your monthly obligations when the underwriter recalculates your ratios. Paying debts helps the ratios only. It does not soften the equity, occupancy, or mortgage payment history tests. All of this is subject to lender guidelines and full file review.
How Does Paying Debts at Closing Work?
You replace your current mortgage with a bigger one. The new loan first pays off the old mortgage. Then it covers closing costs and the financed upfront mortgage insurance. Then it pays the debts you chose to retire. Whatever is left, if anything, comes to you as cash.
The loan is an FHA cash-out refinance. Lendmire’s FHA cash-out refinance program page covers the program basics. Here is the sequence across the wholesale programs Lendmire places files with:
1. Eligibility check. The lender confirms the home is your primary residence. It checks that you have owned and lived in it for 12 months before the case number is assigned. It also reviews your mortgage payment history.
2. Appraisal. The appraised value sets the ceiling on the new loan.
3. Sources and uses. The lender adds up the old mortgage payoff, costs, financed premium, and the debts you want paid. That total has to fit under the ceiling.
4. Payoff documentation. Expect to provide current statements for each debt. The lender must be able to show the debt is paid in full at or before closing and where the money came from.
5. Underwriting. The file runs through automated or manual review. Your ratios are recalculated with the payoffs in place and the new mortgage payment added.
6. Closing. The Closing Disclosure lists each payoff as a line item. In practice, the settlement agent sends the money to your creditors directly from the loan proceeds.
7. Cancellation window. On a primary residence refinance, you get a short cancellation window after signing. Payoffs and any cash to you are released after that window ends, not at the table.
That last step surprises people. You sign, but the creditors are not paid the moment the pen lifts.
What Has to Be True Before Any Debt Gets Paid?
The debt payoff is the last piece of the file, not the first. The gate tests come first, and paying debts does not change them. HUD gives no consolidation discount. The same cash-out tests apply no matter what you do with the money.
| Test | What the lender looks at |
|---|---|
| Occupancy | Primary residence only, one to four units |
| Ownership | Owned and occupied 12 months before the case number |
| Equity | Up to 80% LTV on the appraised value |
| Payment history | Recent mortgage lates can stop a cash-out file |
| Credit | Floor varies by lender and file |
| Ratios | 31/43 base; up to 40/50 with documented factors |
LTV, or loan-to-value, is the new loan divided by the home’s value. Two terms on ratios: the first number is housing cost as a share of gross monthly income, and the second is all monthly debts together. Most files are decided by the automated underwriting finding, with the ratio pairs as the framework.
On credit, the FHA wholesale programs Lendmire places files with start at a 580 decision score for FHA generally. HUD’s own baseline allows lower scores, but the network does not reach below 580. Individual lenders often set a higher bar on cash-out files, so treat the floor as something to confirm per file.
One sentence on a second home or rental: an FHA cash-out needs the home to be your primary residence, so a second home or rental cannot use this program.
Another note for readers who found older pages quoting 85% or 95% leverage: those numbers are out of date. Cash-out leverage on FHA is 80%. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
How Do Payoffs Change Your Debt-to-Income Ratio?
A debt paid in full at closing generally drops out of your monthly obligations. The larger new mortgage payment, including mortgage insurance, goes in instead. Whether you qualify depends on the net change.
Picture a homeowner with two credit card minimums and a car payment. Those three payments add up to a real share of income. After closing, they are gone, but the mortgage payment is higher. If the old payments were bigger than the added mortgage cost, the total ratio improves. If the added mortgage cost is larger, the ratio gets worse, even though the borrower feels less stretched.
This is the point many borrowers miss. A cash-out can fail on ratios because the new mortgage payment is larger than the payments it retires. Paying a card with a small minimum and a large balance often does the least for your ratio and costs the most in equity.
A few mechanics worth knowing:
- Paid off beats paid down. An installment debt that is paid in full at closing, with the payoff on the Closing Disclosure, can come out of the ratio.
- The 10-month rule. Under HUD’s Handbook 4000.1, a closed-end debt can be excluded if it will be paid off within 10 months and the combined payments on such debts stay at or under 5% of gross monthly income. As trade publications quote the rule, you cannot pay a balance down just to fit inside that 10-month window. Check the current handbook, because it changes often.
- Documented factors. If the ratios run above the 31/43 base, the file needs documented compensating factors to reach the higher ratios, up to 40/50 at the top tier.
Which Debts Should the Loan Pay?
Not every debt is worth paying with the loan, and not every debt must be paid. Here is how the main types usually play out. Lenders can set their own overlays, so this is a general guide.
| Debt type | Usually required? | Helps the ratio? |
|---|---|---|
| Credit cards | No | Yes, if paid and closed out of the file |
| Auto and installment loans | No | Yes, if paid in full |
| Court judgments | Often yes | Required to be resolved |
| Collections | Often not required | Depends on the lender |
| Charge-offs | Often not required | Depends on the lender |
Judgments are the main exception. The handbook expects court-ordered judgments to be resolved or paid at or before closing. One way to count a judgment as resolved is a payment agreement with three months of timely payments, provided the judgment does not sit ahead of the FHA lien. For this debt type, payoff at closing is often a requirement rather than a choice.
Collections and charge-offs are generally not a must-pay for FHA qualification, and medical collections are treated differently from other kinds. Some lenders still require them paid or calculate a payment against you. Ask before you assume.
A rule of thumb from the practitioner’s chair: pay the debts that carry the highest monthly payment relative to the balance first. They move the ratio the most per dollar of equity used.
How Is the Loan Sized?
Start with the cap, then work backward. HUD lowered the maximum loan-to-value on FHA cash-out refinances from 85% to 80%, and the limit applies to the property’s adjusted value. Second liens count toward the combined ratio too.
Run it as percentages. Say your home appraises at 100% of value and your current mortgage balance is 60% of that value. The ceiling is 80%, so you have 20 percentage points of room. That room has to cover:
- closing costs,
- the upfront mortgage insurance premium, which is 1.75% of the base loan and is typically financed,
- every debt you want paid.
Whatever room is left is cash to you. If the payoffs and costs use all of the available room under the loan limit, you get no cash back, and the loan simply pays everything at the table. If they use more than that, the file does not fit, and you either pay fewer debts or bring cash.
Mortgage insurance applies to the entire new loan. The annual premium runs between 0.15% and 0.75% of the balance depending on term, loan amount, and LTV. At or below 90% LTV on a thirty-year loan, it ends after eleven years. The schedule sits in HUD Mortgagee Letter 2023-05, which was later folded into the handbook, so confirm the current version. County loan limits apply to the total loan amount, and they change every year. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.
Closing costs and insurance eat into the room before a single creditor is paid. That is why the debts on your list may not all fit.
Where the General Rule Breaks
Most files follow the steps above. A few situations do not.
- Inherited homes. A borrower does not have to occupy an inherited home for a set period before a cash-out, as long as it has not been treated as an investment property since the inheritance. If the borrower rents it after inheriting, 12 months of occupancy as a primary residence come first.
- Manufactured homes. The home must have been permanently installed on its site for more than 12 months before the case number is assigned.
- Forbearance history. The handbook sets conditions, including finishing the plan and making consecutive payments afterward. The exact terms are worth confirming with the lender.
- Streamline confusion. An FHA Streamline refinances an existing FHA loan with no cash back, and it is not a debt payoff tool. Its seasoning test sometimes shows up on cash-out files as a lender overlay. It is not HUD’s cash-out rule.
- Hawaiian Homelands loans. The 80% change did not apply to these loans.
- Conventional comparison. Conventional cash-out refinances use different seasoning rules. Lendmire’s piece How to Qualify for a Cash-Out Refinance by Paying Off Accounts at Closing lays that route out.
Is It Worth It?
It depends on what you swap. You trade short-term, unsecured debt for long-term debt secured by your home. The CFPB has found that this can put the home at risk if payments become unsustainable, while defaulting on a card is unlikely to cost you the house. The same research notes that closing costs can be substantial, that a cash-out may replace a lower-rate mortgage with a higher one, and that card balances rose in the year after refinancing for many borrowers.
Here is the honest tradeoff:
- In your favor: one payment instead of several, a ratio that may improve, and a way to retire high-balance debts.
- Against you: a bigger mortgage, financed insurance, equity used up, and a longer payoff horizon.
A break-even test helps. Compare what the old debts would cost you over the time you will actually keep them against the added cost of carrying that balance inside a thirty-year mortgage. If you plan to move soon, paying them off at closing may make sense. If the debts would be gone in two years anyway, stretching them over thirty is hard to justify.
Reloading is the real killer. Pay off the cards, then run them back up, and you end up with the cards and the larger mortgage. A plan for what happens to those accounts matters as much as the payoff itself.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
What If the Ratios Still Don’t Work?
Payoffs do not fix every file. Here is a quick way to diagnose it.
| Problem | What usually helps |
|---|---|
| Ratio too high after the new payment | Pay off the debts with the largest payments |
| Not enough equity room | Pay fewer debts or wait |
| Recent mortgage lates | Time and clean payments |
| Credit below the lender’s floor | Rebuild before applying |
| Judgment unresolved | Resolve it or set up the agreement |
If the new loan only clears the ratios by a hair, the lender may ask for documented compensating factors. If nothing fits, another route may work better, such as keeping the existing loan and paying down the debts on your own.
Key Terms Defined
Cash-out refinance: A new mortgage larger than the old one, where the proceeds are not limited to paying off the old loan and costs.
LTV (loan-to-value): The loan amount divided by the home’s appraised value. FHA cash-out is limited to 80%.
DTI (debt-to-income): Your monthly debts divided by your gross monthly income.
Payoff statement: A creditor’s document showing the exact amount needed to close an account on a given date.
Upfront mortgage insurance premium: A one-time FHA charge of 1.75% of the base loan, usually financed into the balance.
Cancellation window: A short period after signing a primary residence refinance when you can back out before funds are released.
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. Lendmire is a mortgage broker, and it arranges FHA loans through wholesale lenders. Program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.
Frequently Asked Questions
Does the lender pay my creditors directly, or do I get cash and pay them myself?
Usually the settlement agent pays creditors straight from the loan proceeds, and each payoff appears on the Closing Disclosure. Some lenders require direct payment for certain debts. If you receive cash instead, you pay the debts yourself, and the lender may count them in your ratios.
Do I have to pay off collections to qualify?
Often not. Collections and charge-offs are generally not a requirement for FHA, and medical collections are handled differently. Judgments are the main exception, and a lender can still set its own rule, so ask early.
Will paying off debts at closing lower my debt-to-income ratio?
It can, because a debt paid in full drops out of the monthly obligations, but the larger mortgage payment goes in. The ratio improves only if the old payments were bigger than the added mortgage cost.
How much can I borrow compared with my home’s value?
Up to 80% of the appraised value, including any second liens counted toward the combined ratio. After the existing mortgage, closing costs, and financed premium, the remaining room pays debts first and then becomes cash.
Can I use this on a rental or second home?
No. A standard FHA cash-out is for your primary residence, and occupancy decides the leverage. Different programs handle other property types.
For your own numbers, request a scenario review with Lendmire.
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.
Get Started
Ready to find the right loan for you?
In about 30 seconds you can review financing options available for your home or investment property. No commitment required.
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 FHA INFO and Handbook 4000.1 updates
2. FHA News and Views: FHA home loan rules about borrower debt
3. HUD Archives press release on cash-out refinance risk
4. HUD Mortgagee Letter 2023-05
5. CFPB: Cash-Out Refinances and Paydown Behavior of Non-Mortgage Debt Balances
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 Refinance Requirements at a Glance · How to Time an FHA Cash-Out Within a Year of Buying · Is an FHA Cash-Out Easier to Qualify for When Consolidating Debt?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- 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.