How Much Cash Comes Out of an FHA Cash-Out Refinance for a Child’s Home Gift?

The Quick Read: It depends on your appraisal and your payoff, because the cash is whatever is left of an 80% loan after the old mortgage and the costs come out. The cap applies to the whole new loan, not to the cash you receive. Value times 80%, minus what you owe, minus the costs you roll in, is your gross cash. A child’s gift does not change that formula. It only decides what you do with the money afterward.

What Is the 80% Cap, and Why Isn’t It Your Cash?

The cap is the ceiling on the new loan. The cash is the gap between that ceiling and what you owe.

Under HUD’s published policy, the maximum loan-to-value for an FHA cash-out refinance is 80% of the home’s adjusted value for case numbers assigned on or after September 1, 2019. That is stated in HUD’s FHA knowledge base entry on cash-out limits.

Across the wholesale programs Lendmire places files with, the FHA cash-out reaches 80% LTV on a home you owned and occupied for 12 months before the case number. The 80% is a ceiling on the total loan. Most of it goes to paying off your current mortgage. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.

The common mistake is reading “80%” as “I can take out 80% of my value.” You can’t. If you owe a lot, little is left. If you owe little, a lot is left.

How Do You Work Out the Cash Step by Step?

Start with the appraised value, take 80% of it, then subtract the payoff and the costs you choose to roll in. What remains is the cash that reaches your bank account.

Here is the waterfall, in order:

1. Appraised adjusted value. The FHA appraisal sets this. A low appraisal lowers the cap, and the cash drops with it.

2. Multiply by 80%. That is the largest base loan the program allows on the home.

3. Subtract the payoff of your current first mortgage. Any other lien that must be paid at closing comes out here too.

4. Subtract costs you roll into the loan. Closing costs paid out of pocket do not reduce the cash. Costs rolled in do.

5. Account for the upfront premium. FHA charges an upfront mortgage insurance premium of 1.75% of the base loan, and HUD Mortgagee Letter 2023-05 confirms it applies to all mortgages. It is typically financed into the loan. Whether it counts inside the 80% or on top is a point Lendmire’s lender partners confirm file by file, so don’t plan around the last dollar.

6. What is left is gross cash. That is the money available to give.

Run it on percentages. Say a home appraises at a value and you owe 50% of that value. The cap leaves a 30% slice of value before costs. Say you owe 70%. The slice shrinks to 10%, and costs eat into it fast. The thinner your equity, the more the closing costs matter.

Never plan a gift from a number you have not checked against your own appraisal and your own payoff statement.

Does the Child’s Gift Change the Cash You Get?

No. The refinance and the gift are two separate steps. The refinance gives you unrestricted cash. The gift is what you do with it.

HUD’s definition of a cash-out refinance is a refinance, or an equity withdrawal where no mortgage exists, in which the proceeds are not limited to specific purposes. That means FHA does not stop you from using the money to help a child. The child’s own lender is the one that reviews the gift.

What Does the Child’s Lender Need From the Gift?

The child’s file needs a signed gift letter and a clear paper trail showing the money moved. Both sit on the child’s side of the transaction, not yours.

HUD’s FHA FAQ on gifts of equity lists what the letter must contain. It must be signed and dated by the donor and the borrower. It must give the donor’s name, address and telephone number, the donor’s relationship to the borrower, the dollar amount, and a statement that no repayment is required. A child counts as a family member under HUD’s definition, along with step and foster relationships.

Where files get stuck is the paper trail. Lenders want to see the money leave the donor’s account and land in the child’s. A refinance adds a step: your cash arrives from the new loan first, then moves to the child. Keep the proceeds in your own account, then transfer them by wire or electronic transfer so both statements show it. Cash handed over in person is hard to document. A “gift” line on a Closing Disclosure does not prove the transfer by itself.

On the child’s FHA purchase, the program’s minimum investment is 3.5% of the lesser of price or appraised value at a decision score of 580 or higher, with maximum financing of 96.5%. Whether a gift can cover that whole minimum is a lender-side question, and rules on sourcing the funds apply. The child still has to qualify on their own income, credit and debts. A gift helps with cash. It does not replace qualifying.

What Decides the Final Number?

Five things decide the final number, and the first two move the cash the most.

• The appraisal. It sets the 80% cap.
• The payoff balance. The more you owe, the less is left.
• Your qualifying. The new loan is larger, so your payment goes up. You need to qualify on credit, income and debt.
• How you pay costs. Costs rolled into the loan lower the cash, while costs paid in cash keep it.
• The child’s documentation. A gift that can’t be documented on the child’s file is cash you can’t use as intended.

Some lenders also set higher credit floors than HUD’s minimum on cash-outs. Across the wholesale programs Lendmire places FHA loans with, the floor starts at a decision score of 580. Ratios start at 31/43 for housing and total debt, and documented compensating factors can reach 40/50 at the top tier. Those figures are subject to lender guidelines and full file review.

Who Can Do This Refinance?

You need to have owned and lived in the home as your principal residence for 12 months before the case number. Your existing mortgage does not have to be an FHA loan, because HUD’s definition covers a refinance of any mortgage.

This article is about your primary residence. Rules for a second home or a rental differ, and occupancy decides the leverage. Recent late payments on your mortgage can also block a file. Lenders look at your payment history closely on a cash-out.

County loan limits apply to FHA loans, and the combined first mortgage and any subordinate liens cannot exceed HUD’s nationwide limits.

What Does It Cost You Beyond the Cash?

The new loan is bigger, and the bigger balance means a bigger payment. The CFPB’s guide to using home equity says a cash-out refinance may lengthen the time to pay off your mortgage and may raise your monthly payment because the loan is larger.

FHA mortgage insurance has two parts. The upfront premium is 1.75% of the base loan. 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, the annual premium lasts for the loan’s term. At or below 90%, it ends after 11 years. These are program facts, not a price quote. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.

There is also the risk side. You are turning home equity into a gift. That money is now debt secured by your home. If your income changes, you still owe it. Think about that before sizing the refinance to the child’s full wish list.

Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit. Large gifts can also carry filing questions for the donor. The IRS gift tax FAQ is the place to start.

Gift, Loan or Gift of Equity?

These are three different things, and mixing them up breaks files.

If you expect to be paid back, it is not a gift. HUD requires a no-repayment statement, and a letter that says one thing while the family understands another is a problem. A gift of equity is a separate transaction from a cash-out, and it only works when the parent is selling a property to the child. Some families have a parent co-sign or buy jointly instead. That puts the parent’s debt and credit on the child’s loan.

Common Mistakes

• Planning the gift from 80% of value instead of 80% minus the payoff.
• Using the old 85% limit.
• Forgetting that rolled-in costs shrink the cash.
• Missing a signature on the gift letter.
• Moving cash in a way no statement shows.
• Taking out the full amount without checking whether your own payment still fits.

Size backward instead. Decide the gift amount, add costs, add your payoff, and check the total against the 80% cap. If it doesn’t fit, the gift has to shrink or another route is needed.

Key Terms Defined

Adjusted value: The appraised value HUD uses to measure the loan cap.

Base loan: The loan amount before the upfront mortgage insurance premium is added.

Cash-out refinance: A new mortgage that pays off the old one and leaves cash for any purpose.

Gift letter: A signed statement that money is a gift with no repayment expected.

Gift of equity: A credit for the seller’s equity, used only between family members on a property sale.

Next Step

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. Reach the team at 828-256-2183 or request a quote. Program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.

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. HUD Mortgagee Letter 2023-05

2. HUD’s FHA FAQ on gifts of equity

3. CFPB: Using home equity guide

4. IRS: Frequently asked questions on gift taxes