Many homeowners find themselves stuck in a frustrating spot. They've built real equity over the years, but their credit score keeps them from qualifying for a conventional cash-out refinance. That's exactly where an FHA cash-out refinance can make a real difference. This program lets you replace your current mortgage with a new, larger FHA-insured loan and take the difference in cash — even if your credit score sits in the 580–620 range. In our experience working with Colorado and Florida homeowners, this is one of the most misunderstood refinance options available. This article breaks down how it works, what it costs, and when the numbers actually make sense for you.

What Is an FHA Cash-Out Refinance?

A cash-out refinance replaces your current mortgage with a new, larger loan. You receive the difference between your old loan balance and your new loan amount as a lump sum at closing. An FHA cash-out refinance does this using an FHA-insured loan — which means the federal government backs the lender against default. Because of that backing, lenders can approve borrowers with lower credit scores than a conventional loan would allow.

Per HUD's Single Family Housing Policy Handbook (4000.1), the maximum loan-to-value ratio for an FHA cash-out refinance on a principal residence is 80% of the property's appraised value.

So if your home appraises at $400,000, the largest FHA cash-out loan you can take is $320,000. If your current balance is $200,000, you'd receive up to $120,000 in cash before closing costs. That 80% cap is a hard ceiling — not a target. Your actual number depends on what your home appraises for the day of closing.

One thing we want to clear up right away: you do not need a current FHA loan to use this program. You can do an FHA cash-out refinance even if your existing mortgage is a conventional loan, VA loan, or any other type.

What You Need to Qualify for an FHA Cash-Out Refinance

Credit Score

According to HUD Handbook 4000.1, FHA sets a minimum credit score of 500 for cash-out refinances, though most lenders apply overlays that raise the practical minimum to 580 or higher. In practice, we see very few lenders approve FHA cash-out loans below 580. Many require 620. So if you've seen articles stating you only need a 500 score, that's technically the FHA floor — but not the real-world floor. Ask any lender you're working with what their specific minimum is, not just what FHA allows.

Occupancy and Seasoning

Per HUD Handbook 4000.1, FHA requires that borrowers have owned and occupied the property as their principal residence for at least 12 months before the FHA case number assignment date for a cash-out refinance. This catches a lot of people off guard. If you bought your home 10 months ago, you have to wait. The clock starts from the date you closed on the home — not when you moved in, and not when you paid off any other loans. The home must also be your primary residence at the time of the refinance.

Debt-to-Income Ratio

FHA generally allows a debt-to-income ratio up to 43%, though it may approve up to 50% with strong compensating factors like significant cash reserves or a high credit score. Your DTI compares your total monthly debt payments — including the new proposed mortgage payment — to your gross monthly income. If that ratio runs too high, you'll need to lower the cash-out amount or pay off other debts first.

Loan Limits

According to HUD's 2026 loan limit, the FHA national floor loan limit for a single-unit property is $541,287, and the ceiling in designated high-cost areas is $1,249,125. Your new loan amount must fall within the FHA limit for your county. This matters most in high-value markets like Denver or South Florida, where home prices push loan amounts close to or above those ceilings.

How Much Can You Actually Borrow With an FHA Cash-Out Refinance?

The math is straightforward. Your new loan amount cannot exceed 80% of your home's appraised value. The cash you receive is your new loan amount minus your current balance, minus closing costs. Here's how that looks on a real example.

That $120,000 figure is the gross cash amount. From that, you'd subtract your closing costs to get the actual cash you walk away with. Closing costs typically run 2–6% of the new loan amount, so on a $320,000 loan, expect to pay $6,400–$19,200 at closing. Some borrowers choose to roll those costs into the loan, but doing so raises your balance and your monthly payment.

It's also worth knowing that the final number depends on the appraisal — not your purchase price and not what your neighbor's home sold for. If the appraisal comes in lower than expected, your maximum loan amount drops accordingly.

What an FHA Cash-Out Refinance Actually Costs

Upfront Mortgage Insurance Premium (UFMIP)

Per HUD Handbook 4000.1, every FHA loan — including a cash-out refinance — requires an upfront mortgage insurance premium (UFMIP) equal to 1.75% of the new loan amount. On a $320,000 loan, that's $5,600 added to your loan balance at closing. You don't typically pay this out of pocket — it rolls into your loan. But it does raise the amount you owe and your monthly payment.

Annual Mortgage Insurance Premium (MIP)

Per HUD Mortgagee Letter 2023-05, the annual MIP rate for most FHA loans with an LTV between 78.01% and 90% is 0.50% of the outstanding loan balance. On a $320,000 balance, that's $1,600 per year — about $133 per month added to your payment. Unlike PMI on a conventional loan, FHA MIP on a 30-year loan does not automatically cancel once you reach 20% equity. You'd need to refinance into a conventional loan later to eliminate it.

This is a real cost to weigh carefully. Over five years on a $320,000 loan, MIP adds roughly $8,000 to your total payments. That math still works in your favor if you're paying off high-interest debt. But if you're pulling cash out for a low-return purpose, MIP can tip the scales.

Closing Costs

Beyond MIP, you'll pay standard closing costs — appraisal, title, lender fees, and more. These typically run 2–6% of the new loan amount. Per the CFPB's overview of refinancing, all lenders must provide a Loan Estimate within three business days of your application so you can compare costs across lenders before committing.

FHA vs. Conventional Cash-Out Refinance: Which One Is Right for You?

Most people assume FHA cash-out is only for borrowers with poor credit. That's not entirely true. For borrowers in the 580–680 score range, FHA cash-out often carries more competitive rates than a conventional loan at the same credit tier — even after accounting for MIP. The table below lays out the key differences.

Per Fannie Mae's Selling Guide (B2-1.3-03), the maximum LTV for a conventional cash-out refinance on a primary residence is 80% — identical to FHA. So the LTV rules are a wash. The real differences come down to credit score eligibility and the ongoing cost of MIP.

Per Fannie Mae's Selling Guide, conventional cash-out refinances require a minimum credit score of 620, compared to FHA's minimum of 500 (with lender overlays often at 580–620). If your score falls between 580 and 620, FHA is likely your only path. If it sits above 680, conventional cash-out usually wins on total cost because there's no ongoing MIP. The 620–680 range is where you need to run both scenarios side by side — the MIP cost may or may not be offset by a better rate on the FHA side.

When an FHA Cash-Out Refinance Makes Sense

The strongest use case we see is debt consolidation. According to the Federal Reserve's consumer credit G.19 release, the average interest rate on revolving consumer credit exceeded 21% in late 2023. Rolling a $30,000 credit card balance into an FHA cash-out loan — even with MIP — can cut that interest rate dramatically. The monthly savings often cover the MIP cost and then some.

We worked with a Denver homeowner who had built $140,000 in equity but carried a 607 credit score from medical bills during the pandemic. A conventional cash-out was out of reach. An FHA cash-out refinance let her pull $85,000 in cash, pay off $62,000 in high-interest debt, and reduce her total monthly debt payments by over $900. The MIP added $127 per month. The net savings were still significant.

Home renovations are another solid use case — especially when the improvements increase the home's value. Replacing a roof, updating a kitchen, or adding a bathroom all tend to add more value than they cost.

On the other hand, an FHA cash-out refinance is a harder sell if your current rate is already low. Refinancing into a higher rate to access cash means every dollar you borrow costs more. In that case, a home equity line of credit (HELOC) or — for eligible borrowers — a non-QM loan program might preserve your existing rate while still giving you access to equity. Talk through both paths before you commit.

For a broader look at how all these factors work together, see our guide on what actually affects your mortgage approval.

Frequently Asked Questions