How the FHA Cash-Out Loan Works for Borrowers Priced Out of Conventional

The Quick Read: An FHA cash-out refinance replaces your current mortgage with a larger, FHA-insured loan, and you keep the difference as cash. Across the wholesale programs Lendmire places files with, it reaches up to 80% of your home’s value, and it is built for homeowners whose credit or debt load makes conventional cash-out hard to get. You must have owned and lived in the home for 12 months before the case number. Everything here is subject to lender guidelines and full file review, and nothing is a commitment to lend.

What Is an FHA Cash-Out Refinance?

It is a new mortgage that pays off the old one and hands you the leftover equity. Your old loan disappears. Your rate, term, and balance all reset.

The CFPB describes a cash-out refinance the same way: you replace your existing mortgage with a bigger one and take the difference in cash. The “FHA” part means the new loan carries government mortgage insurance, which is why lenders will work with borrowers they might otherwise turn away.

Lendmire is a mortgage broker. It arranges these loans through wholesale lenders and does not lend itself.

Why Conventional Cash-Out Leaves Some Borrowers Out

Conventional cash-out is picky about credit scores and debt. If your score is middling or your monthly debts are heavy, you can get declined or priced into something that doesn’t make sense.

FHA is built differently. Across the programs we place files with, the starting point is a decision score of 580. (The decision score is the lowest score among all borrowers on the loan.) Some lenders set a higher floor, so a score that works at one may not work at another.

Debt ratios are more forgiving too. The base pair is 31/43, meaning housing costs at 31% of income and total debts at 43%. With documented compensating factors, such as savings or a strong payment record, ratios can stretch as far as 40/50 at the top tier.

That flexibility has a price tag, and it’s mortgage insurance. More on that below.

How Is the Loan Underwritten, Step by Step?

Underwriting is a series of gates. You clear them in order.

1. Ownership and occupancy. You must have owned the home and lived in it as your primary residence for the 12 months before the case number is assigned. The clock runs back from the case number, not from closing. Owning a rental for a year doesn’t count.

2. Payment history. Lenders review your recent mortgage payments, so any late payment will draw attention. Lenders can set stricter standards than HUD, so ask about their history requirements early.

3. Application and Loan Estimate. You apply, and the lender issues a Loan Estimate showing costs, financed costs, and cash to close. The CFPB’s guide to the Loan Estimate and Closing Disclosure walks through how those lines appear.

4. Appraisal. The appraiser sets the value. HUD adjusts it under its rules, and your cash is capped against that adjusted number. A low appraisal shrinks your cash. Sometimes it kills the deal.

5. Underwriting. The lender checks credit, debt-to-income, payment history, and the county loan limit. County limits change every year and vary by place, so they apply but aren’t quoted here.

6. Closing and cash. Money flows in order. The old mortgage is paid off first. Closing costs and prepaid items come next. The upfront mortgage insurance premium is typically added to the loan. What’s left is yours.

How Much Cash Can You Actually Get?

Less than the equity you have. The loan tops out at 80% of the home’s adjusted value, so you must leave at least 20% in the house.

HUD cut the cap from 85% to 80% to lower risk to the FHA insurance fund, lining it up with what Fannie Mae and Freddie Mac allow on conventional cash-out. Earlier, in 2009, FHA had cut it from 95% to 85%.

Here is the math in plain words. Take the appraised value and multiply by 80%. That is your ceiling for the new loan. Subtract your old mortgage payoff. Subtract closing costs and prepaids. The upfront premium is financed on top of the capped base loan, so it does not use up room under the cap. What remains is your cash.

Consider a homeowner with a modest balance and plenty of equity. For that borrower, the cap rather than the credit score limits the cash. A higher score can help with approval, but it does not raise the 80% ceiling.

What Does Mortgage Insurance Do to the Cost?

It adds two layers. HUD sets the upfront premium at 1.75% of the base loan, and most borrowers finance it into the balance. A larger balance means more to repay.

The annual premium runs between 0.15% and 0.75% of the balance, depending on term, loan amount, and LTV. It is collected monthly. Here’s the catch: on a thirty-year loan with a high LTV, the annual premium lasts the whole term. At or below the 90% LTV threshold, it ends after eleven years. A cash-out at the 80% cap would fall in that second group, but your actual figures come from the lender’s file review. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.

These are program mechanics, not advertised prices. The Loan Estimate shows your real numbers.

Closing costs apply to the entire new loan, not just the cash. The CFPB’s research paper on cash-out refinances lists origination fees, appraisal fees, title insurance, and taxes, and notes the total can be substantial. A cash-out is not a cheap second loan.

Where the General Rule Breaks

• Owned less than 12 months. Standard cash-out isn’t available. A rate-and-term refinance, which gives you no cash, can reach a higher loan-to-value than cash-out, up to 97.75% on a principal residence you’ve occupied for the previous twelve months.
• Inherited home. If you rent it out after inheriting, you generally must live in it for 12 months before cash-out is on the table.
• Non-occupant co-borrower. On a purchase, a non-occupant co-borrower is allowed. On cash-out, their income generally can’t be used to help you qualify.
• Second homes and rentals. Occupancy decides leverage. Standard FHA cash-out is for your primary residence only.
• Already have an FHA loan. You may have a better option than cash-out. The FHA Streamline refinances an existing FHA loan with no appraisal and a limited credit review, but it requires a net tangible benefit and doesn’t give you cash.
• Hawaiian Home Lands. Section 247 loans are a separate HUD program and sit outside the 80% cap that governs standard cash-out. They also carry no annual premium.
• Past credit events. HUD’s waiting periods apply: two years from a Chapter 7 discharge and three years from a foreclosure. These are HUD rules, not a promise from any lender.

How Does It Compare With Other Options?

The CFPB says a cash-out refinance may be more or less expensive than a HELOC, depending on terms. If you have a first mortgage you love, a second lien may leave it alone. If you need to replace it anyway, cash-out folds everything into one loan.

What Does the Decision Look Like?

Run through this checklist before you apply:

1. Have you owned and lived in the home for 12 months? 2. Are your recent mortgage payments clean? 3. Does 80% of the home’s value cover your old payoff, costs, and the cash you need? 4. Can you afford the larger balance plus mortgage insurance every month? 5. Is your current loan rate worth keeping? A cash-out replaces it.

Be careful about what the cash is for. The CFPB notes that using your home as collateral puts you at risk of foreclosure if you miss payments. It also says a cash-out replaces your loan, changes its terms, and may stretch the payoff. Rolling credit card balances into the mortgage can feel like relief. But unsecured debt can’t take your home. Mortgage debt can.

A cash-out tends to make sense when the cash builds value or retires costly debt, and the larger payment fits your budget. Skip it if you’d be consolidating debt you’d likely run up again.

Key Terms Defined

Cash-out refinance: A new mortgage larger than your current one, where you receive the difference in cash.

Decision score: The lowest credit score among all borrowers on the loan, used to judge eligibility.

LTV (loan-to-value): The loan amount divided by the home’s value, shown as a percentage.

Upfront mortgage insurance premium: A one-time FHA charge of 1.75% of the base loan, usually financed into the balance.

Net tangible benefit: A measurable gain, required on an FHA Streamline, that shows the refinance helps you.

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 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.

References

1. CFPB: What Other Types of Loans Are Similar to a HELOC

2. CFPB’s guide to the Loan Estimate and Closing Disclosure

3. HUD Archives press release 19-114

4. HUD Mortgagee Letter 2023-05

5. CFPB Office of Research: Cash-out refinances and paydown behavior

6. CFPB: Using home equity to meet financial needs