FHA Cash-Out Refinance Guidelines: What You Need to Know

When it comes to tapping into your home’s equity, an FHA cash-out refinance can be a powerful financial tool. Whether you’re looking to consolidate debt, fund home improvements, or cover other major expenses, understanding the latest guidelines is essential before applying.

In this article, we’ll break down the eligibility requirements, loan limits, and key factors you need to know in 2025.

What Is an FHA Cash-Out Refinance?

An FHA cash-out refinance allows homeowners to replace their existing mortgage with a new FHA loan while pulling out equity in cash. This option can be especially appealing to borrowers with lower credit scores or limited savings, as FHA loans are designed to be more flexible than conventional refinance options.

FHA Cash-Out Refinance Guidelines in 2025

The Federal Housing Administration (FHA) sets specific rules for cash-out refinancing. Here are the current guidelines:

1. Equity Requirements

• Borrowers must have at least 20% equity in their home after the cash-out refinance.
• The maximum loan-to-value (LTV) ratio is typically 80%.

2. Credit Score Requirements

• FHA does not set a minimum credit score, but most lenders require at least a 620 FICO score for cash-out refinancing.
• Some lenders may approve borrowers with lower scores, but higher credit scores usually secure better rates.

3. Seasoning Requirements

• You must have owned and lived in the property as your primary residence for at least 12 months.
• At least 6 months of on-time mortgage payments are required before applying.

4. Debt-to-Income (DTI) Ratio

• FHA generally allows a DTI ratio up to 43%, though some lenders may approve higher with strong compensating factors.

5. Property Types Eligible

• Only primary residences qualify.
• Single-family homes, FHA-approved condos, and some multi-unit properties (up to 4 units) are eligible.

FHA Cash-Out vs. Conventional Cash-Out

While both FHA and conventional loans offer cash-out refinancing, there are key differences:

• FHA Cash-Out: Easier credit requirements, lower down payment history, but requires mortgage insurance premiums (MIP).
• Conventional Cash-Out: Stricter credit requirements, no long-term MIP if you have 20% equity.

Pros and Cons of an FHA Cash-Out Refinance

Advantages

• Flexible credit requirements.
• Can access home equity even with less-than-perfect credit.
• Competitive interest rates compared to personal loans or credit cards.

Disadvantages

• Requires ongoing mortgage insurance premiums.
• Limited to 80% loan-to-value (LTV).
• Must be your primary residence.

Is this Option Right for You?

An FHA cash-out refinance could be a smart move if you:

• Want to consolidate high-interest debt into one lower monthly payment.
• Need cash for home renovations that increase property value.
• Have a lower credit score but enough equity to qualify.

However, if you already have strong credit and 20% equity, a conventional cash-out refinance might save you money long-term by avoiding MIP.

Final Thoughts

FHA cash-out refinance loans provide homeowners with an accessible path to convert equity into cash. By understanding the FHA cash-out refinance guidelines in 2025, you’ll be better equipped to decide if this option fits your financial goals.

At ALCOVA Mortgage, our experienced loan officers can walk you through the process, review your eligibility, and help you determine the best refinance option for your situation.