How Much an FHA Cash-Out Lends to Buy Out a Spouse

The Quick Read: The loan can go up to 80% of your home’s appraised value, and that cap covers everything the new loan pays: your old mortgage, any second lien, the equity owed to your spouse, and financed costs. Whatever room is left under 80% is what funds the buyout. Subject to lender guidelines and full file review, and not a commitment to lend.

Why 80% Is the Number That Matters

The FHA cash-out cap is 80% of the home’s appraised value, and the cap decides the size of your buyout. HUD set that limit in Mortgagee Letter 2019-11, which lowered the maximum loan-to-value (LTV) on cash-out refinances to 80% of what HUD calls Adjusted Value. LTV is the loan balance divided by the home’s value. Older web pages that still say 85% or 95% are out of date. HUD’s news release on the change walks through the history of the cap.

Here is the part people miss. The 80% is not a limit on the cash you receive. It is a limit on the whole new loan. Roughly the first 20% of your home’s value is never lendable on an FHA cash-out. Everything else gets divided among your payoff, your spouse’s share, and costs.

County loan limits apply on top of the cap, and they change every year. In higher-priced counties the limit can bind before the 80% does.

How the Buyout Gets Sized, Step by Step

Think of it as a simple subtraction problem. Take the appraised value, multiply by 80%, then subtract what the loan must pay off. What is left is the most you can put toward the buyout.

1. Start with the appraisal. The appraised value becomes the Adjusted Value, and the 80% test runs against it. A low appraisal shrinks the ceiling, and the room for the buyout shrinks with it.

2. Apply the cap. Multiply that value by 80%. That is the maximum total loan, before any county limit check.

3. Subtract your existing payoff. The new loan replaces your current mortgage, so that balance comes off the top. Any second lien comes off too.

4. Subtract financed costs. FHA charges an upfront mortgage insurance premium of 1.75% of the base loan, and it can be financed. Financed costs count inside the 80%, not on top of it.

5. What remains is the buyout ceiling. If your spouse’s agreed share fits in that gap, the structure works. If not, you have a shortfall.

Picture a home where you owe about half the value and the appraisal comes in right at the contract number. Eighty percent minus 50% leaves about 30% of value to cover costs and the buyout. Now picture a home where you owe 70% of value. That leaves around 10% for everything, and a buyout of any size will probably not fit. The pattern holds: the more you still owe, the smaller the buyout the loan can fund.

Can the Buyout Equity Be Financed?

Yes. Under HUD’s Handbook 4000.1, the equity owed to a departing title holder counts as property-related debt. That means it can be included in the new mortgage calculation. Any cash you keep beyond the buyout is full cash-out, and your lender will confirm how a given file is classified.

The lender needs paper. Expect to provide the divorce decree, a settlement agreement, or another legally enforceable equity agreement that fixes the amount your spouse is owed. A handshake number will not do. The agreement does not have to be a divorce decree, which helps unmarried co-owners and former partners.

Key Terms Defined

Cash-out refinance: A new mortgage that replaces your old one and whose proceeds are not limited to paying off the old debt and costs.

Adjusted Value: The appraised value as HUD adjusts it, which is the number the 80% cap is measured against.

Property-related debt: Money owed that is tied to the home itself, including a documented buyout of a co-owner’s equity.

Title holder: A person whose name is on the deed, whether or not they are on the loan.

Sole borrower: The one person who is reviewed on their own income and credit, with no co-borrower.

Can You Qualify Alone?

Once your spouse leaves the loan, your income and credit have to carry it. Across the FHA programs I arrange through wholesale lenders, the minimum decision score starts at 580, and the base debt ratios are 31/43 (housing costs over income, and total debts over income). Documented compensating factors can stretch those to 40/50 at the top tier, and the automated underwriting finding governs most files. Everything is subject to lender guidelines.

The divorce itself changes the math in a few ways:

• Support you receive can count as income if it is documented and likely to continue for at least the first three years of the new loan.
• Support you pay counts as a monthly debt in your ratios.
• Debts the decree assigns to your ex may be excluded, but generally only if you have a copy of the decree and the creditor has not released you. Your loan officer will check the current handbook on this.
• Pay stubs are reviewed to look for garnishments, so expect to supply recent ones.

The new payment typically rises. You are swapping a two-income household’s payment for a one-income payment on a larger balance, and mortgage insurance applies to that larger balance. 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, it lasts for the life of the loan. At or below 90%, it ends after eleven years. Because the cap holds most buyout loans close to 80%, ask your loan officer which side of that line you land on.

The Timing Rules That Trip People Up

A standard FHA cash-out is only for a principal residence, and you must have owned and occupied the home for 12 months before the case number is assigned. That is the 12-month rule. Employment records or utility bills are the usual proof of occupancy.

Payment history matters too. HUD’s cash-out language, including how post-forbearance payments are treated, appears in Mortgagee Letter 2020-30. Plan on a clean recent history on the mortgage you are replacing.

Two situations deserve a flag:

• Owned less than 12 months. A standard cash-out is generally unavailable. You may need to wait or look at another structure.
• Inherited homes. If you rent a home after inheriting it, you generally cannot take a cash-out until you have lived in it as your principal residence for 12 months.

Where the Rule Breaks

Streamline instead of cash-out. An FHA Streamline refinances an existing FHA loan with no appraisal, a limited credit review, and a net tangible benefit test. It can help remove a name when no equity is owed, for example when your spouse took retirement assets instead of a share of the home. It allows essentially no cash back, so it cannot fund a buyout.

FHA assumption. With an assumption, the existing loan stays in place on the same terms. You still have to pay your spouse their equity separately, and some servicers delay or refuse. The CFPB has documented that homeowners hit these obstacles after a divorce, and that protections for successors in interest expanded in 2016.

Rate-and-term instead of cash-out. If no equity payment is needed, the FHA rate-and-term refinance reaches 97.75% on a principal residence you have occupied for the previous twelve months. A buyout is treated as cash-out unless your underwriter confirms otherwise. Do not plan around the higher number.

Non-occupant co-borrower. On a purchase, a relative who will not live in the home can co-sign. Do not assume the same help is available on a refinance, or that a co-borrower can be added just to meet credit guidelines. Have your loan officer verify the current rule before you count on this.

Investment properties and second homes. A standard FHA cash-out is for the home you live in, so a non-owner-occupied property does not qualify.

Hawaiian Home Lands. Loans insured under Section 247 can be exempt from the 80% limit, though lender guidelines and a full file review still apply. It is a narrow exception.

When the Number Comes Up Short

Add up your payoff, the agreed buyout, and financed costs. If the total is more than 80% of the appraised value, you have a shortfall. You have four realistic options:

1. Bring cash to closing.

2. Offset the buyout with other assets, such as retirement accounts or savings.

3. Negotiate a smaller buyout, ideally with your attorney.

4. Sell the home and split the proceeds.

A low appraisal creates the same problem even when the plan looked fine on paper. Build some cushion into your assumptions. Choosing between keeping and selling can be close. Keeping the home can mean stretching a single income, while selling ends the problem cleanly. Run both versions before you decide.

What Your Decision Looks Like in Practice

Your spouse’s departure from the loan is not automatic. A divorce decree does not remove anyone from the mortgage, because the lender was not a party to the divorce. A quitclaim deed changes title, not the loan. According to CFPB consumer guidance, if one borrower moves out and the loan does not change, both are still legally responsible. Late payments can hurt both credit reports. That post is older, so treat it as a general principle.

In practice, a sound sequence looks like this:

• Get the equity amount fixed in a decree or enforceable agreement.
• Confirm the 12-month ownership and occupancy test.
• Check that you can qualify alone on income and debts.
• Order the appraisal and run the 80% subtraction against the result.
• Close the new loan, which pays off the old note and releases your spouse from it, while the closing agent updates title.

Talk with your divorce attorney about timing relative to the decree. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit. The IRS site at irs.gov is a starting point.

Other programs reach different leverage, so comparing is worthwhile.

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.

For current guidelines and terms, see Lendmire’s FHA loan programs page.

About Lendmire

Lendmire (NMLS# 2371349) is a mortgage broker licensed for consumer lending in 16 states. Lendmire arranges FHA, VA, conventional and jumbo purchase and refinance loans through wholesale lenders; every file is underwritten by the lender under the applicable program guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. HUD Mortgagee Letter 2019-11

2. HUD news release on the cash-out LTV change

3. HUD Handbook 4000.1

4. HUD Mortgagee Letter 2020-30

5. CFPB has documented

6. CFPB blog, homeownership on your own or with someone else

7. IRS