How Lenders Underwrite an FHA Cash-Out Refinance to Buy a New Primary Home

The Quick Read: A lender treats this as two separate files: a cash-out refinance on the home you own, then a purchase of the next one. The refinance is full credit underwriting, capped at 80% of the appraised value, and it requires that you owned and lived in the home for 12 months before the case number. The second file turns on whether FHA will insure another principal residence and on how the old home’s payment counts in your ratios. Everything here is subject to lender guidelines and full file review.

What an FHA Cash-Out Refinance Actually Is

You replace your current mortgage with a larger one and keep the difference in cash. The CFPB describes cash-out refinancing the same way, and notes you often pay closing costs. The new loan is FHA-insured, so FHA mortgage insurance applies, and the home must be your principal residence.

Across the wholesale programs we place files with, the cash-out tops out at 80% LTV on a home owned and occupied for 12 months before the case number. That is lower than the FHA rate-and-term refinance, which reaches 97.75% on a principal residence occupied for the previous twelve months. Different lane, different cap. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.

The “buy a new home” angle changes nothing about those rules. It adds a second transaction that the lender has to fit around the first.

Key Terms Defined

Case number: The FHA identifier assigned to the loan; the 12-month ownership and occupancy test counts back from this date, not from closing.

Adjusted value: The as-is appraised value the lender uses to apply the 80% cap.

Seasoning: The length of time you have owned and occupied the home before applying.

Debt-to-income (DTI): Your monthly debts divided by your monthly income, shown as a pair: housing ratio and total ratio.

Departing residence: The home you are moving out of when you buy the next one.

How Underwriting Runs, Step by Step

Here is the sequence a lender follows on the refinance.

1. Eligibility on the old home. The lender confirms that at least one borrower owned and occupied the home as a principal residence for the 12 months before the case number. It also reviews your mortgage payment history. HUD’s Handbook 4000.1 governs this, and its refinance section was revised in Update 18, so confirm against current handbook text.

2. Credit and application. This is full qualifying, not a streamline. Credit, income, employment and debts are all reviewed. Most files run through FHA’s automated finding, and some are manually underwritten.

3. Appraisal. An as-is appraisal sets the value. The 80% cap applies to that number, so the appraisal decides how much cash is left.

4. The cash math. The new loan pays off the old mortgage first, then the costs. You keep what remains. A low appraisal shrinks that remainder directly.

5. Ratios. The new payment, including taxes, insurance and the FHA mortgage insurance, goes into your DTI.

6. Closing. The cash arrives at closing. Not before.

Timing matters most at that last step. If your purchase contract needs earnest money or a down payment before the refinance closes, the cash is not in your account. Plan the sequence so those funds come from somewhere else, or time the purchase after the refinance funds.

What the Lender Checks, and What to Have Ready

On ratios, the base pair across the networks’ FHA programs is 31/43 with no compensating factors. Documented compensating factors can reach 40/50 at the top tier, and the automated finding governs most files. On credit, the wholesale programs Lendmire places FHA loans with start at a 580 decision score. Some lenders set a higher floor. Credit events follow HUD’s waiting periods: two years from a chapter 7 discharge and three years from a foreclosure.

The Part Most Articles Skip: Two Homes, One Set of Ratios

A lender reviews your file on the refinanced payment and the next home’s payment at once. If you are keeping the old home, both payments hit DTI. That doubled load is the pressure point for these plans.

Two questions decide it.

Can FHA insure the second home? FHA generally insures one principal residence per borrower at a time. Once you refinance the old home into a new FHA loan, a second FHA purchase needs an exception. The common ones are an employment-related relocation, a growing family, or a jointly owned property you are vacating. Relocation typically requires the new home to be a real distance from the old one. The exact tests, including any equity condition on the family-size exception, should be verified against the handbook with your loan officer. Owning a conventionally financed home does not trigger the one-FHA-loan limit, but its payment still counts in your ratios.

Does the old home’s payment count? If you keep it as a rental, rent can offset the payment only in part. HUD’s Mortgagee Letter 2023-17 says that with no rental history, the lender must obtain an appraisal showing market rent and the borrower needs at least 25 percent equity. The rent is then counted at 75 percent of the lesser of market rent or lease rent. If the rent can’t be counted, the full payment on both homes goes into the ratios.

One sentence on occupancy, since it matters: cash-out requires the refinanced home to be your principal residence, and lenders look closely when someone takes cash out and moves out soon after. Be straightforward about your plans on the application.

Refinance First or Buy First?

Refinance-first is the cleanest for sourcing funds. The lender can document the cash-out proceeds as the down payment on the new purchase. Buy-first looks tempting, but cash-out requires the refinanced home to be your principal residence, so a refinance after you have moved out runs into that rule.

Worked Example With No Dollar Figures

Say you own a home with a mortgage balance that is a modest share of its appraised value. The as-is appraisal comes in, and the lender applies the 80% cap to that number. The existing balance and closing costs come out first. What remains is your cash.

Now you plan to buy a new primary home. The lender runs your ratios with the new refinanced payment, plus the next home’s payment. If you will keep the old home as a rental and have 25 percent equity and an appraisal showing market rent, 75 percent of the lesser of lease or market rent can offset that payment. If you will sell, the old payment drops out once the sale closes.

When the ratios sit near the base 31/43 pair, there is little room. With documented compensating factors, a file may stretch toward 40/50, subject to lender guidelines and credit approval.

Where the General Rule Breaks

• The 80% cap is not 80% in cash. It covers the whole new loan. The old balance and costs come out first.
• The 12 months run back from the case number, not from closing.
• Appraisal comes in low. The cash shrinks, sometimes below what the purchase needs.
• No documented rent history on a kept home. Rent may not count, so both payments hit DTI.
• Payment history issues. Lates on the existing mortgage can stall a cash-out file.
• A non-occupant co-borrower’s income is generally not usable on a cash-out loan. Verify this in the handbook for your scenario.
• Second FHA purchase with no exception. The new purchase may have to go conventional.

What It Costs You

FHA loans carry mortgage insurance. Across the programs Lendmire places, that means an upfront premium of 1.75% of the base loan (financed) and an annual premium 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 the annual premium lasts for the term. At or below ninety percent it ends after eleven years. HUD sets the premium schedule, not the lender. HUD’s FHA INFO 2023-11 announced a 30 basis point reduction in annual premiums for many new loans.

The CFPB warns that a cash-out refinance is a loan that must be repaid, and that it may lengthen the time it takes to pay off your home. Closing costs apply too. If you may move again within a few years, weigh whether you’ll recoup them. The CFPB also lists second mortgages and home equity lines as other ways to borrow against equity, so compare them.

Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.

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. Program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.

For your own numbers, request a scenario review with Lendmire.

About Lendmire

Lendmire is a mortgage brokerage (NMLS# 2371349) licensed for consumer mortgage lending in 16 states, arranging FHA, VA, conventional and jumbo purchase and refinance loans through a wholesale lending network. Eligibility is determined by the lender on each file. 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. HUD Handbook 4000.1 Update 18 transmittal

3. HUD Mortgagee Letter 2023-17

4. HUD FHA INFO 2023-11

5. CFPB: Using home equity to meet financial needs

6. CFPB Office of Research blog on cash-out refinances