Do FHA loans permit cash back to the borrower? We get many reader questions in our comments section about this subject. Some want to know if they can borrow more than the cost of the home and use the excess funds for personal use. Others want to know if cash-back refinance options are available on FHA mortgages.
The rules that govern cash back to the borrower can be found in HUD 4000.1. As a general rule, FHA loans for “forward mortgages”, which means typical house purchases, do not allow cash back to the borrower.
There’s an exception for money that was paid up front for something that was later permitted to be included into the loan amount. That would be considered a refund and is not forbidden by FHA loan rules. But simply taking cash out of the transaction is generally not allowed.
HUD 4000.1 has specific guidance for the lender that prevent cash back on certain aspects of an FHA mortgage loan transaction, such as the use of sweat equity, manufactured housing trade-ins, etc.
However, certain FHA loans do provide additional funds for repairs, improvements, upgrades, etc. In such cases an escrow account would be set up and cash disbursements for the specific costs of such activities would be permitted. There may be cases where the borrower is permitted to act as her own contractor, but these would be handled by the lender on a case-by-case basis.
In the case of cash-out refinancing, the borrower may be entitled to any remaining funds left over once the original loan plus any required fees are paid off.
In all cases where an FHA refinance loan features cash back to the borrower, a new credit check and appraisal are required. The appraisal establishes the market value of the home at the time of the new transaction for the purpose of determining the new loan amount, and the credit check is required to insure the borrower can afford the new loan and is still a good credit risk.