Does FHA Still Allow 85% Cash-Out Refinance in 2026?
No — the FHA reduced its maximum cash-out refinance loan-to-value (LTV) from 85% to 80% effective August 1, 2019, under HUD Mortgagee Letter 2019-11. This rule remains in force as of August 2026. Homeowners searching for “FHA cash-out 85%” content online often find outdated articles referencing the pre-2019 program. Under current 2026 FHA cash-out rules, borrowers must retain a minimum of 20% equity in their home after the refinance, down from the previous 15% equity requirement. This change was made by HUD to reduce risk to the FHA Mutual Mortgage Insurance Fund following elevated cash-out volumes and default rates during 2017-2018. For borrowers requiring higher cash-out LTV than 80%, several non-QM alternatives exist and are detailed, below.
Why FHA Reduced Maximum Cash-Out LTV from 85% to 80% in 2019
HUD’s 2019 policy change was driven by risk-management concerns. Prior to August 2019, borrowers could extract equity down to 15% remaining home equity through FHA cash-out refinancing.
HUD data showed that FHA cash-out volume had grown 250% between 2013 and 2018, and cash-out refinances represented an increasing share of FHA loan defaults.
HUD’s Mortgagee Letter 2019-11 explicitly stated the change was intended to “reduce risk” to the FHA Insurance Fund and protect the long-term sustainability of the program for first-time homebuyers who represent the FHA’s core mission (HUD, 2019). Since implementation, the 80% LTV cap has remained unchanged through the 2020 refinance boom, 2022-2024 rate environment, and 2025-2026 stabilization period.
Current 2026 FHA Cash-Out Refinance Rules
FHA cash-out refinancing in 2026 operates under these core requirements (FHA Single Family Housing Policy Handbook 4000.1):
- Maximum LTV: 80% of appraised value (20% minimum remaining equity)
- Minimum FICO for maximum LTV: 580+ FICO required for 80% LTV
- FICO 500-579: Cash-out available at 10% down payment equivalent (90% LTV for purchase not cash-out; cash-out limited to 80% for all FICO tiers)
- 12-month mortgage payment history: All payments on existing mortgage must be current within 30 days for prior 12 months
- Property seasoning: 12 months of ownership from deed recording date required
- Owner-occupancy required: Primary residence only — no investment property or second home cash-out via FHA
- Debt-to-Income (DTI): 43% maximum for automated underwriting; up to 50% with compensating factors and manual underwriting
- Upfront Mortgage Insurance Premium (UFMIP): 1.75% of loan amount (financeable)
- Annual Mortgage Insurance Premium (MIP): 0.55% annual (reduced from 0.85% effective March 20, 2023 per HUD Mortgagee Letter 2023-05)
For deeper coverage of the FHA maximum LTV framework across all product types, see our FHA cash-out maximum LTV rules.
Can I Get an FHA Cash-Out Refinance with Bad Credit in 2026?
Yes — FHA is often the primary pathway for bad-credit borrowers seeking cash-out refinancing in 2026. FHA’s minimum credit score of 500 is significantly more lenient than conventional loan minimums (typically 620-680+). However, borrowers with FICO scores between 500-579 face additional constraints beyond standard cash-out rules. Lender overlays commonly require 580+ FICO for cash-out cases regardless of FHA’s technical 500 minimum. Compensating factors — 12+ months payment reserves, low DTI ratios (under 36%), long tenure of employment, and documented savings pattern — become essential for borrowers with FICO below 620. For borrowers with recent derogatory credit events, see our FHA loans for bad credit for foundational qualification guidance.
Non-QM Alternatives When FHA 80% LTV Isn’t Enough
For borrowers requiring cash-out at higher LTVs than 80%, several non-QM alternatives exist in the 2026 market:
Home Equity Loans (Non-QM): Specialty non-QM lenders offer home equity loans (2nd mortgages) up to 85-90% CLTV, allowing borrowers to preserve their existing first mortgage while extracting additional equity. Rates typically 8-11% in 2026 for well-qualified borrowers.
Non-QM Cash-Out Refinance: Angel Oak, Griffin Funding, Newrez, and Acra Lending offer non-QM cash-out refinance programs at 85-90% LTV with more flexible credit requirements than FHA. Rates typically 8-10% in 2026, with 20-30% higher origination costs than FHA.
VA Cash-Out (100% LTV): Eligible veterans can access up to 100% LTV cash-out through VA programs — significantly higher than FHA’s 80% cap. Requires VA eligibility documentation and satisfies the residual income framework.
Conventional Cash-Out (80% LTV): Fannie Mae and Freddie Mac cash-out programs allow up to 80% LTV — same cap as FHA but often with lower rates for borrowers with 680+ FICO scores.
Portfolio Loans: Community banks and credit unions offering portfolio loans (held on their balance sheet) may accept higher LTV cash-out scenarios based on relationship banking factors. Rates and terms vary significantly.
FAQs: FHA Cash Refinancing Rules
Is FHA cash-out refinance interest tax-deductible in 2026?
Under the Tax Cuts and Jobs Act of 2017 (TCJA), FHA cash-out interest is only deductible when proceeds are used to “buy, build, or substantially improve” the securing home (IRS Publication 936). Cash-out used for debt consolidation, education, medical expenses, or non-home-related purposes is NOT tax-deductible in 2026. Additionally, FHA’s Mortgage Insurance Premium (MIP) tax deduction expired for most borrowers after 2021 — verify current-year deductibility with a licensed tax professional.
How does the 2019 FHA 85% to 80% change affect existing FHA borrowers?
The 2019 change applies only to NEW FHA cash-out refinances originated after August 1, 2019. Existing FHA borrowers with pre-2019 cash-out loans at 85% LTV are not affected — their loans remain in force under original terms. However, if a borrower wants to REFINANCE an existing 85% LTV FHA cash-out, the new loan must comply with current 80% LTV cap.
What credit score do I need for FHA cash-out in 2026?
FHA’s technical minimum is 500 FICO, but most FHA-approved lenders require 580+ for cash-out approval due to overlay requirements. Borrowers with 620+ FICO typically qualify for standard pricing, and 680+ FICO qualifies for best rate tiers. Borrowers with 500-579 FICO face significantly limited lender options and may be redirected to non-QM cash-out alternatives.
The FHA cash-out refinance program remains a valuable tool for owner-occupied homeowners in 2026, but the 85% LTV historical cap no longer applies — 80% is the current maximum since August 1, 2019. Borrowers with bad credit continue to benefit from FHA’s flexible qualification framework, particularly compared to conventional cash-out programs. For LTV requirements exceeding 80%, non-QM alternatives, VA loans (for eligible veterans), and portfolio loans provide expanded options. Ask a loan officer today about guidelines for the FHA cash-out plan through the new government insured lending programs.
References
- Consumer Financial Protection Bureau. (2024). Regulation Z ability-to-repay requirements (12 CFR 1026.43).
- Internal Revenue Service. (2024). Publication 936: Home mortgage interest deduction.
- U.S. Department of Housing and Urban Development. (2019, August 1). Mortgagee Letter 2019-11: Maximum loan-to-value and combined loan-to-value percentages for cash-out refinance mortgages.
Reviewed by: John Tappan, NMLS #394171 – Lender Expert (27+ years) | Updated: August 2026 | Fact-Checked ✓
Additional Refinancing Pages:
FHA Refinancing Loans | 203K FHA Home Improvement Loans | FHA Streamline Refinance | 100% Refinancing | Home Loans for Poor Credit
Disclaimers: This article provides general educational information about FHA cash-out refinancing — it is NOT legal advice, tax advice, or a specific recommendation to pursue any mortgage product. FHA rules and rates change frequently; the information here reflects HUD Single Family Housing Policy Handbook 4000.1 provisions and market conditions as of August 2026. All FHA loans require full underwriting including credit, income, asset, and property review. Cash-out refinance transactions carry federal 3-day rescission rights under TILA (15 U.S.C. § 1635). BD Nationwide is not a lender — we connect homeowners with FHA-approved licensed mortgage professionals experienced in cash-out refinancing.
