- FHA cash-out refinances do not allow non-occupant co-borrowers, even if you have one on your current mortgage.
- Conventional cash-outs can be more flexible, with many lenders allowing co-borrowers who do not reside in the home.
- Additional options include second mortgages such as HELOCs, portfolio loans from local financial institutions, and leveraging other existing assets.
The FHA cash-out refinance loan is an effective way for property owners to tap into their existing home equity. However, applying for a cash-out refi with a non-occupant co-borrower may be difficult, even if the co-borrower is on your original purchase loan.
Can You Have a Non-Occupant Co-Borrower on an FHA Cash-Out Refinance?
While the FHA allows homebuyers to qualify for a purchase loan with help from a non-occupant co-borrower, the rules regarding FHA cash-out refinances are stricter. All borrowers on the mortgage must occupy the home as their primary residence on a cash-out refinance.
FHA Cash-Out Occupancy Requirements
Federal Housing Administration guidelines state: “Any co-borrower or co-signer being added to the note must be an occupant of the property securing the new FHA-insured mortgage. Non-occupant co-borrowers or co-signers may not be added in order to meet FHA’s credit underwriting guidelines for the cash-out refinance.”
The FHA is not the only government agency with this rule: the VA also restricts non-occupant co-borrowers on many loan types, including VA cash-out refinances. The USDA rural development program doesn’t offer cash-out refinances at all.
Why Can’t You Use a Non-Occupant Co-Borrower?
It’s common for homeowners to wonder why they can’t use a non-occupant co-borrower on an FHA cash-out refinance, particularly when they were allowed to use one when obtaining their original loan. The FHA has this rule in place for several reasons:
- Risk level: Cash-out refinances are considered riskier loans, and needing a non-occupant co-borrower to qualify can signal even greater risk to lenders and the program’s overall stability.
- Program intent: The primary intent of the FHA program is to provide an affordable path to homeownership for borrowers who may not qualify elsewhere — leading to more flexibility on purchase loans than on cash-out refinances.
- Abuse prevention: Allowing non-occupant co-borrowers could enable otherwise unqualified homeowners to cash out large sums of equity and then walk away from the property.
- Co-borrower protection: A non-occupant co-borrower could end up liable for a substantial debt while having no claim to the property or its remaining equity.
What You Can Do Instead
Even though you cannot qualify for an FHA cash-out refinance using a non-occupant co-borrower, there are several alternatives to consider.
FHA Cash-Out Refinance With Only the Occupying Borrower
The simplest option is to apply for an FHA cash-out refi in just the name of the occupying borrower. Since the process involves obtaining a brand-new loan, you are under no obligation to use a co-borrower just because they’re on your current mortgage.
Keep in mind that this requires you to meet FHA eligibility requirements on your own, including having sufficient income to support the new, larger debt. FHA guidelines tend to be more relaxed than conventional alternatives, particularly regarding credit scores and allowable debt-to-income ratios.
General FHA cash-out program eligibility standards include:
- Credit score: FHA guidelines allow for a minimum credit score of 500, although nearly all lenders — including Refi.com — impose higher requirements. Refi.com requires a 620 credit score for an FHA cash-out refinance.
- Debt-to-income (DTI) ratio: The FHA allows a debt-to-income ratio as high as 50%, and in some scenarios up to 56.9%.
- Loan-to-value (LTV) ratio: While FHA rate-and-term refinances are available for up to 97.75% of your property’s value, cash-out refis are limited to 80%. This LTV limit includes the funds you plan to cash out, meaning you’ll need more than 20% equity to qualify.
- Occupancy and payment history: You must have resided in the home as your primary residence for at least one year with no late mortgage payments within the past twelve months.
Conventional Cash-Out Refinance
If you aren’t eligible for an FHA cash-out refinance without the help of a non-occupant co-borrower, a conventional cash-out may be worth considering.
Although conventional loans can be more challenging to qualify for, they often allow co-borrowers who do not reside in the home. According to Fannie Mae, “Guarantors, co-signers, and non-occupant borrowers are permitted on purchase, limited cash-out and cash-out refinance transactions.”
As Erica Nunley, founder and CEO of Nunley Home Buyers, notes: “Unlike FHA loans, most conventional loans do not have a restriction on non-occupant co-borrowers. This means that if the borrower has a family member or close friend willing to be a co-signer on the loan, they may be able to qualify for a cash-out refinance with their help.”
Refinancing into a conventional loan may also reduce your monthly payments if it means canceling FHA mortgage insurance. All FHA cash-out refinances carry an upfront mortgage insurance premium (UFMIP) of 1.75% of your total loan balance, plus an ongoing annual premium of 0.5% for most borrowers.
Basic conventional cash-out guidelines — which apply to both the borrower and any non-occupant co-borrower — include:
- Minimum credit score requirements vary by lender. Refi.com requires a 660 credit score.
- A DTI limit of up to 45% (50% may be allowed in some circumstances)
- A total LTV no greater than 80% (75% for properties with two-to-four units)
- The current primary loan must be at least 12 months old
- An on-time payment history with no 60-day late payments within the past year
| Product | Rate | APR |
|---|---|---|
| 30-year Fixed Fha Refinance | 6.15% | 7.36% |
| 30-year Fixed Refinance | 6.84% | 6.88% |
How we source rates and rate trends
Home Equity Loan or HELOC
Home equity loans and home equity lines of credit (HELOCs) are types of second mortgages that allow you to access your property’s equity without refinancing your existing loan. Since these are not conforming loans, each lender has the freedom to set their own restrictions on non-occupant co-borrowers.
Some of the benefits of a home equity loan or HELOC include:
- More flexible qualification requirements
- Access to a higher level of equity, with 85% and 90% LTV limits common
- Lower closing costs than refinancing your entire mortgage balance
- The ability to hold onto a primary loan with a favorable interest rate
As Faiza Ahmed, founder of Property Mesh, puts it: “It’s smart to explore a Home Equity Line of Credit (HELOC) if a full refinance isn’t ideal. I’ve seen a lot of success stories with people tapping into their home’s equity without resetting their entire mortgage.”
Portfolio Loans From Local Banks and Credit Unions
FHA and conventional cash-out refinance loans are commonly packaged and sold to institutional investors on the secondary mortgage market. Portfolio loans, on the other hand, are retained on the books of local banks and credit unions.
Since these loans aren’t being sold, lenders can offer more flexibility when setting borrower requirements. Many portfolio lenders will allow non-occupant co-borrowers, even on cash-out refinances.
Leverage Other Assets
If you can’t qualify for a cash-out refinance — whether because of eligibility guidelines, restrictions on non-occupant co-borrowers, or equity limitations — consider leveraging other assets to access the cash you need. For most homeowners, this could include borrowing against an investment portfolio or retirement savings account. Some lenders also offer cash-out refinances on automotive loans.
Sell and Buy Again Jointly
If you need cash in the short term and have no other alternative, you may want to consider selling your current home and jointly purchasing another property with your co-borrower.
For example, if you owe $225,000 on your $300,000 home, selling would give you access to roughly $75,000 in equity minus selling-related expenses. You could then apply for a new FHA purchase loan on another residence with your non-occupant co-borrower — and with a 3.5% down payment on a $300,000 home ($10,500), the remaining funds would be available for your immediate cash needs.
Keep in mind that in addition to selling costs, you’d also be responsible for closing costs on the new loan, and there may be tax implications as well.
How a Cash-Out Refinance Works
How, exactly, does a cash-out refinance work? The process is straightforward: you apply for a larger loan than you currently have and use the funds to pay off your original mortgage. The amount left over — the equity you’re “cashing out” — is disbursed to you as a lump sum a few days after closing.
As noted throughout this article, the guidelines for a cash-out refinance tend to be stricter than for a purchase loan, including higher credit score requirements, lower LTV allowances, and loan-specific limitations such as non-occupant co-borrower restrictions.
Tips for How to Use the Funds From a Cash-Out Refinance
When you tap into your built-up equity with a cash-out refinance — whether FHA or conventional — you can use the money in just about any way you see fit. Many borrowers choose to use cash-out funds to:
- Make home improvements
- Pay off credit card balances
- Consolidate high-interest debts
- Cover college tuition or other major life expenses
- Purchase a second home or investment property
Final Thoughts
Program guidelines do not allow applicants to qualify for an FHA cash-out refinance with the help of a non-occupant co-borrower. However, other options — including a conventional cash-out refi — can be more accommodating. And many homeowners may be eligible for an FHA cash-out on their own, thanks to the program’s more relaxed lending standards.
Ready to find out how much you could access with a cash-out refinance? Explore your options with Refi.com and take the first step toward putting your equity to work.
