Reverse Mortgage Vs Cash-Out Refinance
A HECM reverse mortgage and a cash-out refinance both let you access the equity in your home. They qualify you in different ways, use different waiting periods, and can pay off different debts. Here is how FHA and Fannie Mae rules compare, side by side.
Side by side at a glance
Each line pairs an FHA HECM rule, or a rule of our reverse mortgage program, with the matching FHA or Fannie Mae cash-out rule. Neither loan fits every homeowner.
- Age: every HECM borrower must be at least 62 at closing, with no maximum age. FHA also sets no maximum age for a cash-out; the borrower must be old enough to sign a mortgage note that can be enforced.
- Credit: a HECM has no minimum credit score, but the lender always obtains a credit report. FHA requires a minimum decision credit score of 500. Fannie Mae sets no minimum score for loans run through DU.
- Income: every HECM includes a financial assessment with a residual income test. FHA and Fannie Mae cash-out loans qualify you on income and your debt-to-income (DTI) ratio.
- Waiting periods: for a HECM, at least one borrower must be on title before the application date. FHA cash-out needs 12 months of owning and living in the home. Fannie Mae needs six months on title.
- Liens: a HECM must be a first lien, and our program does not allow other financing behind it. FHA and Fannie Mae cash-out loans can pay off existing mortgages.
- Use of the money: only debts attached to the home can be paid at a HECM closing. FHA cash-out proceeds are not limited to specific purposes, and Fannie Mae equity may be used for any purpose.
Age 62 starts a HECM
Credit rules differ by loan
Income is tested differently
Waiting periods are separate
The HECM must be first
Debts paid at closing differ
How The Two Loans Compare
A HECM is FHA’s reverse mortgage for accessing equity in your principal residence. A cash-out refinance is a forward mortgage that replaces your current loan, or places a new one on a home you own free and clear.
A HECM Traditional lets a homeowner access equity in the home they already live in. Every borrower must be at least 62 at closing, and the home must be each borrower’s principal residence. Everyone must first receive counseling from a HUD-approved HECM counselor. There is no minimum credit score, but the lender obtains a credit report and an underwriter assesses your willingness and capacity to meet your financial obligations. Income must be reasonably likely to continue through at least the first three years, and liquid assets can be converted into imputed income. How much is available depends on the age of the youngest borrower or eligible non-borrowing spouse, the expected rate, and the maximum claim amount.
An FHA cash-out refinance replaces any mortgage, or takes equity from a home with no mortgage, and the proceeds are not limited to specific purposes. It is allowed only on an owner-occupied principal residence. At least one borrower must have owned and lived in the home as a principal residence for the 12 months before case number assignment, unless the home was inherited and never treated as an investment property. FHA requires a minimum decision credit score of 500, and the underwriter calculates your DTI ratio. Pensions, 401(k) distributions and Social Security count as retirement income.
A Fannie Mae cash-out refinance pays off existing mortgages with a new first mortgage, or places a new mortgage on a home owned free and clear. A first mortgage being paid off must be at least 12 months old, while second liens of any age can be paid off. At least one borrower must have been on title for at least six months before the new loan disburses, with no waiting period for an inherited home. Equity taken out may be used for any purpose. Through DU, the maximum DTI ratio is 50%. To see how a HECM handles an existing loan, read our reverse mortgage payoff page.
Why borrowers ask Saxton
This page is for homeowners 62 and older, and the family helping them, who are weighing a HECM against an FHA or Fannie Mae cash-out refinance.
The HECM Must Be First
A HECM must be a first lien of record. Existing liens on the home are paid off at closing from HECM proceeds, and our program does not allow other financing behind the HECM. If proceeds cannot cover what must be paid, you bring funds to closing.
Lien Age Matters Differently
HECM money can pay off a non-HECM lien in place longer than 12 months before closing; newer liens qualify only under narrower exceptions. Fannie Mae can pay off second liens of any age, but a first mortgage being paid off must be at least 12 months old. FHA instead looks at 12 months of owning and living in the home.
Card Debt Is Treated Differently
Only debts attached to the home can be paid at a HECM closing. Credit cards, installment loans and other debts not attached to the home cannot be paid off then. FHA cash-out proceeds are not limited to specific purposes, and Fannie Mae equity may be used for any purpose.
What You Keep Paying
With a HECM you remain responsible for property charges: property taxes, hazard insurance, any flood insurance, ground rents, condo, PUD and HOA fees, and special assessments. You must insure all improvements on the home. Each year you certify the home is still your principal residence.
Retirement Income Counts
FHA counts pensions, 401(k) distributions and Social Security as retirement income. Fannie Mae accepts pension, annuity and retirement income documented with items such as an award letter, benefit statement or bank statement. A HECM can also convert liquid assets into imputed income.
When A HECM Comes Due
A HECM has no fixed maturity date, but it can become due when no surviving borrower lives in the home, when a borrower is away more than 12 months in a row because of illness and no other borrower lives there, when an obligation is not met, or when a borrower conveys all of their title and no other borrower keeps title. It can be prepaid without penalty.
Hear From Homeowners Like You
Frequently Asked Questions
Common questions from homeowners comparing a reverse mortgage with a cash-out refinance.
Only for the HECM. Every HECM borrower must be at least 62 at closing, and there is no maximum age. FHA sets no maximum age for a cash-out refinance either; the borrower must be old enough to sign a mortgage note that can be enforced.
FHA does: a borrower is not eligible for FHA-insured financing with a minimum decision credit score below 500. A HECM has no minimum credit score, and scores are not a criterion for evaluating one, but the lender still obtains a credit report. Fannie Mae does not require a minimum score for loans underwritten through DU; DU assesses your creditworthiness instead.
Each loan has its own rule. For a HECM, at least one borrower must be on title before the application date. For an FHA cash-out, at least one borrower must have owned and lived in the home as a principal residence for the 12 months before case number assignment. For Fannie Mae, at least one borrower must have been on title for at least six months before the new loan disburses, unless an exception applies, such as an inherited home.
Not with FHA. FHA allows cash-out refinances only on owner-occupied principal residences. A HECM also requires the home to be the principal residence of each borrower.
Not a HECM. Only debts attached to the home can be paid at a HECM closing; revolving, installment and other debts not attached to the home cannot. With an FHA cash-out, the proceeds are not limited to specific purposes, and Fannie Mae says equity taken out may be used for any purpose.
Not under its employment-related assets rule on a cash-out refinance. That rule, which turns eligible 401(k), IRA and similar balances into qualifying income, applies to purchases and limited cash-out refinances only. Fannie Mae notes those assets may still be eligible under its other standard income guidelines. Retirement account distributions you already receive can be used when the lender documents they are expected to continue for at least three years.
Property charges: property taxes, hazard insurance, any flood insurance, ground rents, condo, PUD and HOA fees, and special assessments. If HECM funds were set up to pay some charges and fall short, you must pay them yourself. If unpaid charges cannot be covered and you do not pay within 30 days of the due date, the HECM becomes due and payable.
Find out what you qualify for
Tell us about your home, any current mortgage and what you want the money to do, and we will go over how a HECM and a cash-out refinance would each apply to you.
Get Pre-Qualified- U.S. Department of Housing and Urban Development, FHA and housing resources
- U.S. Department of Housing and Urban Development, FHA mortgage insurance premiums
Loan amounts, rates, terms, and eligibility are subject to credit approval, asset and income verification, appraisal, and program guidelines. Program availability varies by state. Not all applicants will qualify. Saxton Mortgage, LLC is an Equal Housing Lender.