FHA Cash-Out Refinance Rules — The Quick Read: An FHA cash-out refinance replaces your current mortgage with a larger one and pays you the difference in cash. Three tests decide whether you get there: you must have owned and lived in the home for 12 months, the new loan can reach 80% of the home’s appraised value, and your credit and payment history must hold up under review. Every figure here is subject to lender guidelines and full file review, and nothing here is a commitment to lend.
What Is an FHA Cash-Out Refinance?
It is a refinance where the new loan is bigger than what you owe. The old mortgage gets paid off. Whatever is left after closing costs and prepaid items comes to you as cash.
The loan is insured by the Federal Housing Administration. That insurance is why lenders can accept borrowers with more modest credit than a conventional loan usually allows. You pay for that insurance, which we cover below.
Lendmire is a mortgage broker licensed for consumer lending in 16 states. It arranges FHA loans through wholesale lenders and does not lend directly. If you want the program overview, see the FHA cash-out refinance program page.
Key Terms Defined
Loan-to-value (LTV): The new loan amount divided by the home’s appraised value, shown as a percentage.
Case number: The FHA identifier assigned to your file. Its assignment date is the reference point for the occupancy test.
Decision score: The credit score the lender uses to decide your file under FHA rules.
Upfront mortgage insurance premium (UFMIP): A one-time FHA insurance charge, set as a percentage of the base loan and usually financed into it.
Annual mortgage insurance premium (MIP): The ongoing FHA insurance charge, billed monthly.
Overlay: A rule a lender adds on top of the FHA minimum.
How Does the Occupancy Rule Work?
You must live in the home as your primary residence, and one borrower must have owned and occupied it for the 12 months before the case number is assigned. Standard FHA cash-out is for owner-occupied principal residences only. A second home or a rental does not qualify. Occupancy decides the leverage, so that is the whole answer on those.
A few details matter in practice:
- The clock runs from the case number. Count back 12 months from the day it is assigned.
- Ownership and occupancy both count. Owning for a year while renting the home out does not meet the test.
- Manufactured homes must have been permanently installed on a site for more than 12 months before the case number.
- Inherited homes are the named exception. No minimum occupancy period applies, as long as the home was never treated as an investment property. If you rent it out after inheriting, you must then occupy it for 12 months before a cash-out is allowed.
Across the wholesale programs we place files with, the inheritance exception is the one borrowers most often have not heard of. It requires documentation of how you came to own the home, so gather that early.
How Much Can You Borrow? The 80% Loan-to-Value Cap
The FHA cash-out refinance reaches 80% LTV, which means at least 20% equity must remain in the home after closing. HUD set this cap in Mortgagee Letter 2019-11, lowering the earlier, higher limit for case numbers assigned on or after September 1, 2019. HUD’s stated reason was reducing risk to the FHA insurance fund from rising balances on cash-out loans. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.
If you still hear that FHA lets you borrow 85% or more, that is outdated. The same letter exempts Section 247 Hawaiian Homelands mortgages from the change, but that is a narrow case.
Here is how loan sizing works, step by step:
1. The appraiser sets the home’s value. 2. The lender multiplies that value by 80% to get the maximum new loan. 3. The payoff of your current mortgage comes out first. 4. Closing costs and prepaid items come out next. 5. What remains is your cash.
The 1.75% upfront premium can be financed into the loan, which counts toward the 80% cap. That means it shrinks your cash. If you owned the home under 12 months, some lender programs base the limit on the lesser of the appraisal or the original purchase price. Confirm that with your loan officer, since it is a lender-level detail.
Compare that with other FHA refinances. The FHA rate-and-term refinance with an appraisal reaches 97.75% on a principal residence occupied for the previous twelve months, but it does not put cash in your hand beyond limited amounts. The FHA Streamline refinances an existing FHA loan with no appraisal, a limited credit review and a net tangible benefit. It is a different product with different rules. A cash-out gets the full underwriting and occupancy tests.
What Credit Do You Need?
FHA sets a baseline, and lenders add overlays on top. That is why you will see different credit minimums from different lenders. Some set a higher floor than others, and the strictest ones can sit well above what FHA itself requires.
Across the wholesale programs Lendmire places FHA loans with, the starting point is a 580 decision score. HUD has a lower tier for some FHA borrowers, but the network does not reach below 580. At 580 or higher, FHA allows maximum financing on a purchase. Cash-out is capped at 80% regardless, so a higher score does not buy you more leverage on this loan. It can help your approval and your file, but not the cap.
Payment history matters as much as the score. HUD’s guidance, in Mortgagee Letter 2014-02, says all payments on the mortgage you are refinancing must have been made within the month due for the previous 12 months. That letter is old, so treat it as the long-standing principle. Lenders may apply their own version. A 30-day late in the past year can stop a cash-out file even when your score looks fine.
If you have had a bankruptcy or foreclosure, HUD’s waiting periods apply: two years from a chapter 7 discharge and three years from a foreclosure. Those are HUD’s rules, not a promise from any lender.
Our guide on the minimum credit score for a cash-out refinance explains how scores work across loan types.
How Does Underwriting Look at Income and Debt?
The lender checks whether your income can carry the new, larger payment. FHA measures this with two ratios. The housing ratio compares your housing costs to income. The total ratio adds your other monthly debts.
The base pair is 31/43 with no compensating factors. Documented compensating factors can reach 40/50 at the top tier. Compensating factors are strengths in your file, such as cash reserves or a strong credit history. For most files, the automated underwriting finding governs.
Two income rules trip people up:
- A non-occupant co-borrower cannot help. On a cash-out, their income does not count toward qualifying. This differs from FHA purchase loans, where a non-occupant co-borrower is allowed.
- Rental income from an accessory dwelling unit (ADU) on a one-unit property cannot be used to qualify.
Nonprofit agencies and state or local government agencies are not eligible borrowers for FHA cash-out refinances.
What Does Mortgage Insurance Add?
FHA mortgage insurance has two parts, and both apply to a cash-out. The upfront premium is 1.75% of the base loan amount, per HUD’s Mortgagee Letter 2023-05. It is usually financed into the loan.
The annual premium runs between 0.15% and 0.75% of the balance, depending on term, loan amount and LTV. HUD explains the structure on its FHA Answers page. On a thirty-year loan above 90% LTV, the annual premium lasts for the term. At or below 90% LTV, it ends after eleven years. Because FHA cash-out caps at 80%, the shorter schedule can apply on terms where that rule fits, but the exact result depends on your loan. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
Refinancing one FHA loan into another within three years can reduce the new upfront premium through a refund credit. It is a credit, not cash. Ask your loan officer whether it applies.
Where the Rules Break: Edge Cases
- Inherited home: the 12-month occupancy test is waived unless you rented the home.
- Home with no mortgage: a free-and-clear home can still be refinanced as a cash-out. The payment history test has nothing to measure, so the focus shifts to credit, income and appraisal.
- Short mortgage history: HUD’s older guidance says payments must be on time for the life of the loan if it is under 12 months old. Lenders may add seasoning overlays, so confirm before you apply.
- Three- and four-unit homes: older HUD material describes a self-sufficiency test and post-closing reserves. Confirm current requirements with your loan officer.
- A low appraisal: the cap applies to appraised value. A lower number means a lower maximum loan and less cash.
What Does the Decision Look Like in Practice?
Picture a homeowner who has lived in the house for several years, kept every payment on time, and has meaningful equity. After the 80% cap, the payoff, the financed upfront premium and closing costs, some cash remains. The real question is whether that cash is worth the higher balance and the added insurance.
The Consumer Financial Protection Bureau warns that paying non-mortgage debts with mortgage debt can raise foreclosure risk. Its research on cash-out borrowers also found credit score gains faded over time. Borrowing only what you need is the safer habit.
Compare your options:
| Option | What it does | Occupancy test |
|---|---|---|
| FHA cash-out | Pays you cash, up to 80% LTV | 12 months owned and occupied |
| FHA rate-and-term | Changes the loan, little cash | Occupied previous 12 months |
| FHA Streamline | Refinances an FHA loan, no appraisal | Existing FHA loan required |
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
If you owned for less than a year, a seasoning rule may be the obstacle. Our piece on cash-out refinance seasoning covers waiting periods in general terms.
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.
Frequently Asked Questions
Can I do an FHA cash-out refinance if I bought less than 12 months ago?
Usually not. One borrower must have owned and occupied the home for the 12 months before the case number. The inheritance exception is the main way around that. Even then, some programs base the limit on the lesser of appraised value or original price.
Do I need an existing FHA loan?
No. A conventional loan or a free-and-clear home can be refinanced into an FHA cash-out if you meet the occupancy, equity and credit tests. The FHA Streamline is the product that requires an existing FHA loan.
Can I add a co-signer to qualify?
Not for income. A non-occupant co-borrower’s income cannot be used on a cash-out refinance. An occupying co-borrower who lives in the home is a different situation.
Is FHA mortgage insurance permanent?
It depends. The annual premium lasts for the loan term on a thirty-year loan above 90% LTV. Cash-out loans cap at 80%, but your actual result depends on the loan terms. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.
Can I use it on a second home or rental?
No. Occupancy decides the leverage, and FHA cash-out is for the home you live in.
For the program’s current guidelines, see a scenario review with Lendmire.
About Lendmire
Lendmire — NMLS# 2371349 — is a mortgage broker that arranges FHA, USDA and HUD-184 home purchase financing with grant-style, forgivable and repayable down payment assistance options 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.
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References
1. HUD Mortgagee Letter 2019-11
2. HUD Mortgagee Letter 2014-02
3. HUD Mortgagee Letter 2023-05
4. HUD FHA Answers: Mortgage Insurance Premium structure
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.
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
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Disclosure information. Lendmire is a state-licensed mortgage brokerage under NMLS# 2371349. Lendmire is not a depository institution, direct lender, or financial advisor — all loans referenced are placed through wholesale lender partners and are subject to each lender's underwriting standards. This article is provided for general informational purposes and is not a commitment to lend, nor does it constitute financial, legal, or tax advice. Loan programs, terms, rates, and qualification standards change without notice and depend on borrower profile, property type, and the state in which the subject property is located. Equal Housing Opportunity provider. NMLS Consumer Access: nmlsconsumeraccess.org.