The Quick Read: A parent can fund a child’s down payment with an FHA cash-out refinance, but two separate loans have to pass two separate sets of tests. The parent’s home must be a primary residence owned and occupied for 12 months before the case number, and the new loan can reach 80% of the home’s value. The child’s lender then needs a signed gift letter and a traceable transfer. All of this is subject to lender guidelines and full file review.
Two Loans, Two Rulebooks
FHA has no special “gift-funding” cash-out product. The parent’s refinance is an ordinary cash-out refinance. The child’s gift is an ordinary gift. Each one gets judged on its own.
FHA cash-out estimate
Seeded with an example value, a balance to match, and a round cash request; change any field.
Editable benchmark: 7.24% as of October 29, 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.
| Item | Parent’s loan | Child’s loan |
|---|---|---|
| What it is | FHA cash-out refinance on the parent’s home | Purchase loan (FHA, conventional or other) |
| Who is judged | The parent | The child |
| What matters | Occupancy, payment history, equity, repayment-capacity | Gift letter, transfer trail, source of funds |
| Role of the cash | Becomes the parent’s own money at closing | Counts as a documented gift |
That split explains most of what goes wrong. A parent can qualify perfectly and still hand the child a gift file the child’s lender will not accept. The reverse happens too. Plan both halves from the start.
What the Parent Has to Qualify For
Across the wholesale programs Lendmire places FHA loans with, the cash-out refinance follows a short list of rules. Lendmire’s FHA cash-out refinance program page lays out the program in more detail. Here are the pieces that matter for a gifting plan.
The home must be your primary residence. FHA cash-out is for the home you live in. It is not available on a rental or investment property.
You must have owned and lived in it for 12 months before the case number. The case number is the FHA’s file identifier, assigned early in the process. The 12-month clock runs backward from that date. Payments over that period need to have been made as due. Equity does not replace this rule, no matter how large it is.
The new loan tops out at 80% of the home’s value. Equity left after closing is at least 20% on the base loan. That cap covers the whole base loan, not just the cash portion. It is the practical ceiling on what you can pull out to give away. HUD cut the limit from 85% to 80%, and older web pages still show the old number.
You qualify on credit, income and debt ratios for the bigger loan. Ratios start at 31/43 (housing payment over income, then total debts over income) with no compensating factors. Documented strengths such as reserves or strong credit can stretch that to 40/50 at the top tier. Most files are decided by the automated underwriting finding. Credit minimums vary by lender and loan scenario.
A full appraisal is part of the process. The value drives the 80% cap, so the appraisal sets how much cash is possible.
How Much Can You Actually Gift?
The cash you can gift is the new loan, minus what pays off your current mortgage, minus costs. Those costs include the appraisal, title work and lender charges, plus FHA mortgage insurance. Your Loan Estimate itemizes all of it.
Run a modeled scenario. Say your home appraises at a value you know and your current mortgage balance is a modest share of it. The new loan can reach 80% of value. Subtract the payoff and the closing costs. What remains is your cash, and the gift comes out of that.
The upfront FHA premium is 1.75% of the base loan, and HUD Mortgagee Letter 2023-05 lists no exemption for a cash-out. It can be financed. When it is, it sits on top of the 80%-tested base loan. The annual premium is a separate monthly cost, between 0.15% and 0.75% of the balance depending on term, loan amount and LTV. On a thirty-year loan above ninety percent LTV, it lasts the full term. At or below ninety percent, it ends after eleven years. Because the cash-out cap is 80%, the shorter schedule is the one that typically applies, though your lender confirms it on your file.
Here is the catch. Every dollar of cash comes with a larger loan balance. The CFPB’s guide to using home equity says a cash-out refinance replaces your mortgage with a larger loan, and that your payment may rise and your payoff may take longer.
The Step-by-Step Sequence
1. Check your own eligibility. Confirm primary residence, 12 months of ownership and occupancy, and a clean payment history.
2. Talk to the child’s lender early. Ask what gift documentation they want. Small details, like who sends the money to whom, are easier to fix before the money moves.
3. Apply and get the case number. The 12-month clock is measured from this date.
4. Appraisal and underwriting. You are underwritten for the larger loan. The gift does not reduce your qualifying payment, so the new payment has to fit your budget on its own.
5. Closing. The new loan pays off the old one and the costs. The rest comes to you as cash. Refinances on a principal residence generally carry a right-of-rescission period under federal law, so ask your lender when funds are actually released.
6. Move the gift. Send the money from your own account to the child or the settlement agent.
7. Child’s lender documents it. They collect the gift letter and the transfer evidence.
8. Child closes. Your cash has to be in hand and traceable before this date.
Timing is where plans break. A purchase contract has deadlines. A refinance has its own steps. If the child’s contract date arrives before your funds do, you have a problem that money cannot fix.
What the Child’s Lender Needs
HUD’s FHA guidance on gifts sets out what a gift letter has to say. It must be signed and dated by both donor and borrower. It must include:
- the donor’s name, address and phone number;
- the donor’s relationship to the borrower;
- the dollar amount;
- a statement that no repayment is required.
A parent or grandparent qualifies. HUD’s definition of “Family Member” includes a child, parent or grandparent, as well as in-laws, step-relatives and a spouse or domestic partner.
The letter alone is not enough. The lender also documents the money trail. Under a HUD update that applies to newer case files, acceptable evidence includes the donor’s bank statement showing the withdrawal plus proof of deposit, a canceled check plus proof of deposit, a withdrawal receipt plus proof of deposit, or an electronic transfer record. That is PennyMac’s summary of HUD’s guidance, so check current Handbook text for your file.
Two practical rules follow:
- Do not hand over cash. A pile of bills leaves no trail.
- Do not make the gift a loan in disguise. If the child quietly plans to repay you, the no-repayment statement is untrue, and the lender may ask questions.
Gift funds cannot come from an interested party in the sale, such as the seller, the agent or the builder. That is the general rule, and the child’s lender confirms it on their file.
If the child buys with a conventional loan instead, the gift rules are similar. Fannie Mae’s Selling Guide also requires a letter with the amount, a no-repayment statement and donor details. The lender must verify the funds sit in the donor’s account or were transferred to the borrower. Newer versions of that guide exist, so treat this as a general picture.
On the child’s side, FHA purchase loans work from a 3.5% minimum investment at a decision score of 580 or higher, with maximum financing of 96.5%. A gift can cover that minimum investment and closing costs, subject to the lender’s review.
Where the General Rule Breaks
You owned the home less than 12 months. Standard FHA cash-out is off the table. Some programs carve out exceptions, such as inheritance, but those depend on the lender. Ask before you plan around one.
Your home is paid off. A new loan on a free-and-clear home is generally still a cash-out refinance, not a rate-and-term.
You have a non-FHA mortgage today. A conventional or VA loan can generally be paid off by an FHA cash-out. Your lender confirms how it applies to you.
You want to sell the child your home at a discount. That is a gift of equity, which is a different thing. HUD allows equity credit as a gift only between family members on a sale. It does not involve a refinance at all.
You want an FHA Streamline. A Streamline refinances an existing FHA loan with no appraisal and is not a cash-out. It cannot fund a gift.
You want to co-sign or co-own with the child. Then you are a borrower on the child’s loan, and the analysis changes. FHA allows a non-occupant co-borrower on a purchase, but that is a different plan with different risk to you.
Rules change. HUD updates its handbook. Confirm current language in HUD’s Handbook 4000.1 hub before you rely on any summary, including this one.
Is This a Good Idea for You?
That is the real question, and it is yours, not the lender’s.
You are taking on a larger loan secured by your own home to help someone else buy theirs. Your payment likely goes up. FHA mortgage insurance adds cost on top of it. Equity you give away is gone from your own cushion. Weigh that against your retirement plans and your income.
Think about it in three parts:
- Can you afford the bigger payment on your own? The gift does not shrink it.
- Can you absorb a lower cushion? Less equity means less room if the home loses value or you need cash later.
- Is the child ready to buy? The child still has to qualify for their own loan.
Other routes exist, and each has tradeoffs. A home equity line or loan keeps your first mortgage intact. A gift from savings avoids new debt entirely. A gift of equity works only if you are selling. If you want to see how jumbo equity compares, Lendmire’s article on the best jumbo cash-out refinance program to make a gift to a child buying a home walks through the larger-loan side.
Gift tax is the donor’s concern, not the child’s. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit. The IRS gift tax FAQ is a good place to start.
Where Plans Fall Apart
These are the common failure points on files like this:
- An unsourced deposit in the child’s account, with no matching withdrawal.
- A gift letter missing a required item, or with an amount that does not match the transfer.
- A parent who closed the refinance but did not wait for funds to be released.
- A purchase contract deadline that lands before the refinance can close.
- A parent who missed the 12-month occupancy or payment-history test and found out late.
Most are paperwork problems, and most are avoidable with one early conversation with each lender.
Documents to Gather
Parent’s file: proof of primary residence, 12 months of mortgage payment history, income and asset documents, current mortgage statement and homeowners insurance.
Child’s gift file: signed and dated gift letter, donor’s bank statement showing the withdrawal, proof of deposit into the child’s account or settlement agent, and the parent’s closing paperwork if the lender asks for the source.
Key Terms Defined
Cash-out refinance: A new, larger mortgage that pays off your current one and gives you the difference as cash.
Case number: The identifier FHA assigns to a loan file; the 12-month ownership and occupancy clock counts back from it.
Gift letter: A signed statement that money is a true gift with no repayment expected.
Gift of equity: A discount on the sale price of a home sold to a family member, treated as a gift.
Base loan amount: The loan before the financed upfront mortgage insurance premium is added.
Interested party: The seller, agent, builder or anyone else with a stake in the sale, who cannot provide gift funds.
Frequently Asked Questions
Can the child’s entire down payment be a gift?
Whether the child’s entire down payment can be a gift depends on the lender’s guidelines and the child’s file. The child’s lender reviews the letter and the transfer trail.
Does the gift have to come from a refinance?
No. A gift can come from savings, from a home equity loan or from any acceptable source the donor owns. The child’s lender cares that the money is the donor’s, documented and not repayable. A refinance is one way to create the cash.
Do I need an FHA loan already?
No. A conventional, VA or other mortgage can generally be paid off by an FHA cash-out refinance. You do need to meet the 12-month primary-residence ownership and occupancy test and make payments as due.
Can the child pay me back later?
No. The gift letter must say no repayment is required, and a repayment arrangement defeats the gift. If you want the money returned, it is a loan, and it changes the child’s qualifying picture.
What if I have owned the home for less than a year?
Standard FHA cash-out generally is not available. Some narrow exceptions exist, such as inheritance, but they vary by lender. Check with your loan officer before you build a purchase timeline around one.
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. See also Lendmire’s piece on the best cash-out refinance program for a first-home down payment gift.
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.
For the program’s current guidelines, see FHA loan programs.
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References
1. HUD announcement on the FHA cash-out loan-to-value reduction
2. HUD Mortgagee Letter 2023-05
3. CFPB guide to using home equity
4. HUD FHA FAQ on gifts of equity and Family Member definition
5. PennyMac’s summary of HUD’s guidance
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: Best FHA Cash-Out Refinance Program to Maximize Your Cash Out · How an FHA Lender Sizes a Cash-Out Refinance Against a Streamline
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Compliance and disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage broker and is not a direct lender, depository institution, financial advisor, or tax professional. Content in this article is general market analysis and educational information — not financial, legal, or tax advice for any specific situation. Lendmire does not guarantee loan approval; every transaction is subject to underwriting by the funding lender. Mortgage pricing and loan program guidelines are subject to change at any time without notice and vary by borrower characteristics, property type, and state regulations. Lendmire complies with Equal Housing Opportunity. Licensure verification: NMLS Consumer Access.