The Quick Read: A conventional cash-out refinance on a primary one-unit home generally needs at least 20% equity left after the new loan is in place. The new loan is capped at 80% of the appraised value, and that cap includes any closing costs you finance. The conventional loan sets the equity rule, not the FHA loan you are paying off. Approval also depends on credit, income ratios, the appraisal and your payment history, subject to lender guidelines.
What “Equity” Means Here
Equity is the appraised value minus what you owe. The 80% cap is measured against the appraised value, not what you paid and not an online estimate. An appraisal that comes in lower shrinks the maximum loan dollar for dollar.
The number that matters is the equity left after the cash comes out. Many borrowers check their equity today and stop. That is the wrong test. The test is whether the new, larger loan still sits at or under 80% of value.
Fannie Mae’s Eligibility Matrix sets the cash-out limit for a one-unit principal residence at 80%. Two to four units and second homes sit lower, at 75%. Occupancy and unit count change the answer, so check which one applies to you first.
Key Terms Defined
LTV (loan-to-value): The new loan amount divided by the appraised value.
CLTV (combined loan-to-value): All loans against the home added together, divided by the appraised value.
Cash-out refinance: A new first mortgage that pays off the old one and gives you cash from the equity.
Limited cash-out (rate-and-term) refinance: A refinance that pays off the old loan and costs, with only a small amount of cash back.
Seasoning: The time you have owned the home or had the existing loan before you can refinance.
MIP (mortgage insurance premium): The insurance charge on an FHA loan, paid upfront and annually.
How the Equity Math Works, Step by Step
The math is simple. Run it in this order.
1. Start with appraised value. Say the home appraises for 100 units of value. That is your base.
2. Apply the cap. At 80%, the largest new loan is 80 units.
3. Subtract the FHA payoff. The payoff is the principal balance plus accrued interest. Any escrow balance is refunded to you separately.
4. Subtract closing costs and financed items. Appraisal, title, origination and prepaid items come out of the same room under the cap.
5. What is left is your cash. If the payoff and costs already use up the 80 units, there is no cash to take.
A borrower who owes 60% of value has room under the cap, but costs shrink the cash. A borrower who owes 75% has very little room. A borrower who owes more than 80% cannot do a conventional cash-out at all.
The Fannie Mae Selling Guide section on cash-out refinances says the new loan can pay off existing mortgages, finance closing costs and give the borrower cash for any purpose. The cap in the matrix is the ceiling on all of it together.
Why Recent FHA Borrowers Often Have Thinner Equity Than They Expect
FHA’s main draw is a low down payment. The program reaches 96.5% financing with a 3.5% minimum investment from a 580 decision score, across the wholesale programs Lendmire places files with. That means a borrower starts with very little equity.
Early payments are mostly interest, so the balance drops slowly. Most early equity comes from price growth, and that is exactly what an appraisal tests. A borrower who bought at 96.5% financing and has seen modest appreciation may still sit above the 80% cap.
The upfront FHA premium is 1.75% of the base loan and is typically financed. That adds to the balance from day one. It makes the starting equity position a little thinner than the down payment alone suggests.
The Two Seasoning Clocks
Two waiting periods apply, and both must be met. Borrowers often remember only one.
- The existing first mortgage must be at least 12 months old, measured from its note date to the new note date.
- At least one borrower must have been on title for six months before the new loan funds.
Fannie Mae added the 12-month existing-loan test in Selling Guide Announcement SEL-2023-01. An FHA loan under 12 months old fails it for a conventional cash-out. Waiting is the fix.
A buyer who paid cash may be able to use a delayed financing exception that skips the six-month title wait. It rarely helps an FHA borrower, because an FHA loan is financing, not cash.
Also, a home that is listed for sale generally has to come off the market before the new loan funds. Confirm the current rule with your lender.
Cash-Out vs. Limited Cash-Out: Same Home, Different Ceiling
Taking more than a small amount of cash back changes which tier your loan falls in. The difference is large.
| Refinance type | Cash to borrower | Equity expectation |
|---|---|---|
| Conventional cash-out, one-unit primary | Any amount, any purpose | 80% maximum loan, about 20% equity left |
| Conventional limited cash-out | Small cap only | Much higher LTV ceiling |
| FHA cash-out | Any amount | 80% maximum on a home owned and occupied for 12 months |
| FHA rate-and-term | Little or none | Up to 97.75% on a primary residence occupied for the prior twelve months |
| FHA Streamline | None | No appraisal, net tangible benefit required |
Fannie Mae’s limited cash-out guidance caps cash back at the greater of 1% of the new loan balance or $2,000. Go past that and the loan is a true cash-out with the 80% cap.
The higher limited cash-out tier, up to 97% on a one-unit loan, applies only when Fannie Mae owns or securitizes the loan being refinanced, per Fannie Mae’s 97% LTV FAQs. An FHA loan is not one of those. Most FHA borrowers leaving FHA should plan around the 80% cap and ask the lender to confirm. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.
What Happens to Mortgage Insurance
Paying off the FHA loan ends the FHA premium, because the loan itself ends. That is often the reason borrowers look at conventional in the first place.
FHA’s annual premium does not drop off at 20% equity on newer loans. On a thirty-year loan above 90% LTV, the annual premium lasts for the term. At or below 90%, it ends after eleven years. The HUD Mortgagee Letter 2023-05 lays out the premium schedule, and the Congressional Research Service overview of FHA loans explains that cancellation no longer follows an equity threshold for loans from June 2013 on. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.
At an 80% maximum loan, a conventional cash-out generally would not carry private mortgage insurance, since that insurance normally applies above 80%. Confirm that with your lender on your specific file.
Two cautions. The old FHA premium is gone, but the new loan has its own costs. And a cash-out leaves you with a bigger balance than a rate-and-term would.
If the Appraisal Comes in Low
Here is where files stall. Picture a borrower who expects the home to appraise at a certain value and plans to take cash. The appraisal lands a few percent lower. The 80% cap drops with it. Cash shrinks, and a borrower right at the edge may lose the cash-out entirely.
Plan with a cushion. Do not size the loan to the exact edge of your own estimate. Ask for the appraisal’s comparable sales and check them. If a real error shows up, your lender can advise on requesting a reconsideration of value.
Where the General Rule Breaks
The 80% rule has named edge cases.
- Two to four units and second homes. Lower caps apply, as the matrix shows. An owner-occupied one-unit gets the top tier.
- Reserves. The matrix says extra reserves may apply to cash-out loans run through Desktop Underwriter when the debt-to-income ratio is high. Ask what yours would be.
- Lender overlays. Some lenders set a limit below the agency cap or a higher credit score floor for the full 80%. That is why two quotes for the same borrower can differ.
- Late payments on the FHA loan. Underwriting reviews payment history. Recent lates can limit the outcome even when the equity is there.
- State rules. Some states have special home-equity rules. Ask a licensed professional about yours.
What If You Don’t Have Enough Equity?
You have options, and some beat forcing a conventional cash-out.
- Wait. Payments and appreciation both build equity. Time also clears the seasoning clocks.
- Pay down the balance. A lump-sum payment can bring the new loan under the cap.
- Take less cash. A smaller cash amount may fit under the cap when a larger one does not.
- Stay in FHA. The FHA cash-out refinance program also reaches 80% LTV on a home owned and occupied for 12 months before the case number. It keeps the FHA premium, but it uses FHA ratios and credit rules, which are more forgiving. Across the wholesale programs Lendmire places FHA loans with, a decision score of 580 or higher is the starting point.
- Think about the base ratios. FHA’s base pair is 31/43, and documented compensating factors can reach 40/50 at the top tier. Conventional underwriting is generally stricter, so a borrower who clears FHA may not clear conventional.
For another angle on weighing leverage against cost, Lendmire’s piece How Much Equity a DSCR Cash-Out Needs to Beat a Second Lien covers a different product, but its lien-versus-refinance logic is useful context.
Is It Worth Switching? A Practical Decision Frame
Weigh three things.
1. What you give up. FHA is lenient on credit and ratios. Conventional is stricter.
2. What you gain. The FHA premium ends. You may take cash for any purpose.
3. What it costs. The CFPB’s research on cash-out refinances lists origination, appraisal and title fees among the costs. Those either reduce your net cash or add to the loan balance. Many borrowers use part of the proceeds just to cover them.
Cash-out also raises your balance. That means a bigger monthly obligation, which can change your debt-to-income ratio. And a larger loan leaves less cushion if prices fall.
Cash-out is a loan against your home, not income. Use it for something that holds its value or pays you back, such as debt payoff or repairs. Tax treatment of the proceeds and interest can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Self-Check Before You Apply
- Is the home my primary residence, one unit?
- Is my FHA loan at least 12 months old?
- Have I been on title for at least six months?
- Is the home off the market?
- Would the new loan, with costs, stay at or under 80% of a conservative value?
- Have my FHA payments been on time?
- Will my debt-to-income ratio hold with the bigger balance?
If any answer is no, fix that first.
Closing and Your Right to Cancel
A refinance of your primary home carries a federal three-business-day right to cancel. The CFPB explains that you must cancel in writing, not by phone. Funds generally disburse after that window ends.
If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches.
Frequently Asked Questions
Can I get cash out of an FHA loan with a conventional refinance?
Yes, on a primary home that meets seasoning and underwriting rules. The new conventional loan pays off the FHA loan and gives you cash. The new loan generally cannot exceed 80% of the appraised value on a one-unit primary residence.
Does a conventional cash-out remove FHA mortgage insurance?
Yes. Paying off the FHA loan ends its premium because the loan itself ends. The new loan may carry its own insurance depending on its terms, so ask your lender.
Do I need 20% down to do this?
No. The 20% is equity left after the new loan, tested against appraised value. It is not a down payment. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
Will my FHA premium drop off once I hit 20% equity?
Not on newer FHA loans. Cancellation depends on the original LTV and the loan term, not on current equity. A refinance is one way the premium ends.
Does hitting 80% guarantee approval or a set cash amount?
No. The 80% figure is a ceiling. Credit, debt-to-income, reserves, the appraisal and payment history can all limit the outcome. Program details are subject to lender guidelines and full file review, and nothing here is a commitment to lend.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire is a mortgage brokerage (NMLS# 2371349) licensed for consumer mortgage lending in 16 states, arranging FHA, VA, conventional and jumbo purchase and refinance loans through a wholesale lending network. Eligibility is determined by the lender on each file. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Fannie Mae Eligibility Matrix
2. Fannie Mae Selling Guide B2-1.3-03, Cash-Out Refinance Transactions
3. Fannie Mae Selling Guide Announcement SEL-2023-01
4. Fannie Mae Selling Guide Announcement SEL-2025-08
6. HUD Mortgagee Letter 2023-05
7. Congressional Research Service overview of FHA loans
8. CFPB’s research on cash-out refinances
9. CFPB: Right of Rescission on a Refinance
This article is part of Lendmire’s FHA Loan series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: Refinancing An FHA 203(k) Loan After The Renovation Is Done · FHA Simple Refinance Vs FHA Streamline: The Appraisal Makes The Difference · FHA Cash-out Refinance Credit Requirements: The Floor And The Overlays Above It
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Compliance and disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage broker and is not a direct lender, depository institution, financial advisor, or tax professional. Content in this article is general market analysis and educational information — not financial, legal, or tax advice for any specific situation. Lendmire does not guarantee loan approval; every transaction is subject to underwriting by the funding lender. Mortgage pricing and loan program guidelines are subject to change at any time without notice and vary by borrower characteristics, property type, and state regulations. Lendmire complies with Equal Housing Opportunity. Licensure verification: NMLS Consumer Access.