What Is an FHA Cash-out Refinance, and How Does It Work?

When you need to borrow a larger sum and have a fair amount of equity built up in your home, a cash-out refinance can be an excellent option, particularly if you could get lower interest rates on a new mortgage compared to taking out a separate loan.  

Qualifying for a cash-out refinance can be tricky, but an FHA cash-out refinance (refi) is a viable option. The requirements to qualify for an FHA cash-out refi are looser than conventional options, but you should consider the additional costs before you sign on the dotted line. 

What is an FHA cash-out refinance plan?

An FHA cash-out refinance plan is a loan backed by the Federal Housing Administration that allows homeowners to refinance their mortgages and access their home equity as cash. Homeowners replace their mortgage with a larger one, and they get the difference in cash for various uses, such as debt consolidation or home improvements.

To qualify, homeowners typically need at least 20% equity in their homes and must meet the FHA’s credit and debt-to-income requirements. The FHA offers flexible credit standards but requires mortgage insurance premiums (MIP), which can raise the loan cost.

FACOP stands for “Federal Assistance Cash-Out Program,” a term some lenders use interchangeably with an FHA cash-out refinance. The two terms may seem similar, but FACOP is not an official designation by the FHA. Instead, it’s often a marketing tactic some companies use to refer to the FHA cash-out refinance program.

What is FACOP?

Tip

⚠️ An FHA cash-out refinance is a legitimate, government-backed loan that allows homeowners to refinance their mortgage while taking out cash based on their home equity. However, be cautious of any offers that refer to FACOP or FACOP refi, especially if they seem too good to be true. We’ve seen reports of online scams using the term. Remember, only FHA-backed cash-out refinances, which are insured by the FHA, are considered legitimate. Always verify that the FHA backs your loan to ensure its authenticity.

How does the FHA cash-out program work?

In general, FHA loans are offered by private lenders and guaranteed by the Federal Housing Administration. A “guarantee” isn’t what it sounds like at first; it just means that if you don’t repay the loan, your lender can recoup some of that lost money from the FHA. This principle applies to purchase loans and cash-out refinance loans. 

Because your lender is less likely to lose money on the deal, it might be more willing to approve FHA loans than conventional options. When you zero in on cash-out refinance, the FHA guarantee can be helpful because lenders often have stricter requirements for these larger loans.

In return for that government-backed guarantee, you’ll pay extra costs. An FHA cash-out refinance charges all the regular FHA loan fees, and the cost can be substantial. Borrowers must pay two types of Mortgage Insurance Premiums (MIP):

1. Upfront MIP: 1.75% of your loan amount, paid as a one-time fee. It can be financed with your loan.
2. Annual MIP: 0.15% to 0.70% of your balance, depending on your loan amount and term length. It can be divided and added to your monthly payments. You’ll pay this fee for at least 11 years, up to the remainder of your mortgage. 

What are FHA cash-out refinance rates?

No one keeps track of specific FHA cash-out refinance loan rates, although this information is available—in general—for all FHA loans. In September 2024, the average 30-year FHA loan came with an interest rate of 5.883%, compared to 6.08% for conventional 30-year loans.  

Although the interest rate may be smaller, you’ll still need to factor in the extra cost of the mortgage insurance premiums. The annual MIP fee, in particular, can drive up the cost of your monthly payments, making it critical to ensure you have enough room in your budget.

Who is eligible for the FHA cash-out plan?

To qualify for an FHA cash-out refinance, you must meet certain criteria:

• Loan limit: Up to $498,257 (or up to $1,149,825 in certain high cost-of-living areas)
• Residency: Must have used the home as your primary residence for the last 12 months.
• Property type: Owner-occupied. If you rent out a part of your home, you can’t use the income to qualify for the loan.
• Minimum credit score: 500, but most individual lenders require a higher score.
• Mortgage forbearance: You’re not eligible for a cash-out refi until you’ve exited a forbearance program and made at least 12 on-time payments.
• Loan-to-value ratio (LTV): 80% or less
• On-time mortgage payments: Must have paid your mortgage on time for at least the past 12 months.

Note that there are no rules about the type of mortgage you can refinance. If you have an FHA loan now, you can apply for an FHA cash-out refinance like someone with a conventional mortgage.

Understanding how the LTV works regarding your potential cash-back amount and loan limit is also important. You can only borrow up to 80% of your home’s value, meaning you’re not even eligible for a cash-out refi until you’ve paid off a decent amount of your mortgage.

And while you could borrow up to $498,257 in most areas of the country, the 80% cap on your home is an important limit to understand. If you own a $200,000 home, for example, you can borrow up to $160,000 (80% of your home’s value). But if you still owe $100,000 on your mortgage, you’d be limited to getting just $60,000 in cash back. 

Read More

How to Calculate Your Current Home Equity 

How do you get an FHA cash-out refi?

If you decide an FHA cash-out refi is right for you, the application process isn’t much different compared to other cash-out refinance options. Here’s how the process works:

1. Check your qualifications: It’s worth double-checking that your credit score, estimated home value, mortgage balance, and other requirements are where they need to be before you apply for an FHA loan cash-out refinance.  
2. Shop for lenders: Check your loan options with three or more cash-out refinance lenders to ensure you have a choice of options. This can help you identify the most affordable loan.
3. Submit an application: Gather financial documents to submit to your lender with a full application. Keep in touch with your lender in case it requires additional information.
4. Go through the underwriting process: You’ll undergo underwriting similar to when you first bought your home, including getting an appraisal. Be sure to keep paying your original mortgage until you hear otherwise. 
5. Get your loan funds: If you’re approved, your lender will send the funds to your old lender to pay off the loan and pay you the remainder as your cash-out amount. You’ll begin making monthly payments to your new lender instead. 

Pros and cons of the FHA cash-out plan

An FHA cash-out refinance can help you get the funds you need for many different uses, but it comes at a high price. Here’s what to consider if you decide whether it’s worth applying.

Pros

• Easier credit qualification

• No restrictions on use of funds

• Interest may be tax-deductible if you use the cash for home improvements

Cons

• Underwriting takes several weeks

• MIP increases your monthly payments

• Resets the clock on paying off your home

• Increases your overall interest costs over time

• Lower loan and LTV limits compared to other refinance loans

• Closing costs add hundreds or thousands of dollars to loan amount

Is the FHA cash-out plan right for you?

An FHA cash-out refi can be a solid option if the following details apply to you:

• You have at least 20% in home equity.
• You don’t need the additional funds right away.
• You need to borrow a significant sum.
• You don’t qualify for other cash-out refinance programs.
• You’ve checked your monthly budget and you can afford the higher potential payments.
• You’re likely to get a lower interest rate on a new mortgage than the one you’re paying now.
• You’re OK with extending the time it takes to pay off your home and paying additional financing costs.
• You’ve lived in your home for at least a year and haven’t made any late payments or been in forbearance during that time.

In addition, it’s important to rule out your other funding options. Low-cost government grants and loans are often available to help people on a limited income afford home repairs and energy-efficient upgrades, for example. 

Personal loans, home equity loans, and home equity lines of credit (HELOCs) are all viable ways to borrow money that don’t require replacing your entire mortgage. Just as you shop around for different lenders, you should consider other products before deciding whether an FHA cash-out refi is right for you.

If you’re looking for an FHA cash-out refinance due to a lower credit score, there are multiple alternatives to consider, including: 

1. Potentially opting for a home equity loan or HELOC, or if the the funding needed is not high, it could be wise to consider traditional lending through a private loan with a credit union. 
2. FHA Streamline refinancing, which requires less credit documentation and underwriting.
3. Government assistance programs that can help homeowners obtain loans/financing. 

I recommend working with a financial professional or counselor with expertise on this subject matter.

Erin Kinkade, CFP®

FAQ

What is the FHA Streamline Refinance program vs. the FHA cash-out refinance?

The FHA Streamline Refinance program is designed for homeowners with current FHA loans. It allows them to refinance with minimal documentation and no home appraisal. It typically offers lower interest rates and simplified processing but doesn’t allow borrowers to get cash back.

The FHA cash-out refinance allows homeowners to refinance their mortgage into a larger loan, using their home’s equity to take out cash. This option is available to FHA and non-FHA borrowers but requires more documentation and a home appraisal.

Can you get an FHA home equity loan?

The FHA does not offer a traditional home equity loan. Homeowners can tap into their home’s equity with the FHA cash-out refinance. Refinancing your mortgage for a higher amount than you owe and pocketing the difference in cash is somewhat similar to a home equity loan.

Is the FHA cash-out program legit?

Yes, the FHA cash-out refinance program is a legitimate refinancing option through the FHA. It allows homeowners to access the equity in their homes and convert it into cash, provided they meet the program’s eligibility requirements, including minimum credit score, equity, and loan-to-value ratio. But if you see the acronym “FACOP,” this could be a red flag. Ensure the FHA legitimately backs the product before proceeding.

What credit score is needed for an FHA cash-out refinance?

For an FHA cash-out refinance, the minimum credit score required is generally 500. However, many lenders set their own standards and may require a higher score—around 620 or above—for the best rates and terms. The required credit score can vary depending on the lender and your overall financial profile.