The Quick Read: Often yes, if the problem is your credit profile and not your equity. FHA does not let you borrow more than conventional does on the home you live in. Both stop at 80% of the home’s value. What FHA changes is who gets approved and how the cost is built. For strong-credit borrowers, conventional is frequently the cheaper route.
Key Terms Defined
Six terms come up again and again in this decision. Here they are once, in plain words.
- Cash-out refinance: a new mortgage that pays off your old one and hands you the extra equity as cash. One loan replaces the other.
- LTV (loan-to-value): your loan balance divided by your home’s appraised value. A balance of $80 on a $100 home is 80% LTV.
- CLTV (combined loan-to-value): the same ratio, but it adds every loan against the home, including a second mortgage or HELOC.
- Mortgage insurance premium (MIP): FHA’s insurance charge. You pay part up front and part every year, and it protects the lender, not you.
- DTI (debt-to-income ratio): your monthly debts divided by your monthly income. Lenders run two versions: housing alone and all debts together.
- Decision score: the credit score a lender uses to underwrite your file. On a joint file, lenders generally use the lower borrower’s score.
What Does “Too Costly” Actually Mean for a Conventional Cash-Out?
“Too costly” usually means one of three different problems. Each has a different fix.
The first is a credit-tier problem. Conventional pricing steps up as scores drop, and the steps get steep in the lower tiers. A borrower who clears the minimum can still be priced out.
The second is a debt-ratio problem. A high DTI can cost you pricing, cash, or the approval itself. Conventional guidelines tighten as ratios climb.
The third is a leverage problem. You want more cash than the equity allows. FHA does not solve this one. We will get to why.
Being priced high is not the same as being declined. If you were declined, FHA may open a door. If you were quoted a high price but approved, you have a comparison to run, and FHA does not automatically win it.
Does FHA Let You Borrow More Than Conventional?
No. The caps match on a primary residence. HUD Mortgagee Letter 2019-11 cut the maximum LTV and CLTV on FHA cash-out refinances to 80%. Before that change, FHA allowed more, and plenty of old web pages still repeat the higher number. Ignore them.
HUD said the cut brought FHA in line with the maximum cash-out leverage Fannie Mae and Freddie Mac allow, according to its press release on cash-out lending. Fannie Mae’s eligibility matrix shows the same 80% ceiling for a one-unit principal residence. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.
So if equity is your limit, switching programs changes nothing. You need at least 20% equity left after the new loan, and any second mortgage or HELOC counts toward that 80%. Pay attention to that last part. A HELOC balance can quietly eat the cash you thought you had.
Where FHA Actually Helps
FHA helps with approval and flexibility. Pricing and available terms vary by lender, borrower profile, property type, and full underwriting review. Some lenders set their own stricter minimums, such as for credit scores, so the same program can look different from one lender to the next.
Ratios work the same way. FHA’s base pair is 31/43, meaning housing costs up to 31% of income and total debts up to 43%. Documented compensating factors can stretch that, reaching 40/50 at the top tier. Compensating factors are strengths in the file, such as cash reserves or a long, clean payment history. Most files are decided by the automated underwriting finding, which weighs everything together.
FHA’s insurance premiums are set by loan size, term, and LTV, not by your credit score. That is a real feature for a borrower in a lower credit tier, where conventional pricing and insurance can climb. It is the main reason FHA beats conventional for some files. (And for plenty of borrowers, it does not.)
You can read more about the program on Lendmire’s FHA cash-out refinance program page.
What Does FHA Mortgage Insurance Do to the Cost?
It adds a layer conventional may not have. FHA charges mortgage insurance on every loan.
- Upfront premium: 1.75% of the base loan amount, which HUD’s Mortgagee Letter 2023-05 confirms applies to FHA mortgages generally. Most borrowers finance it into the balance.
- Annual premium: between 0.15% and 0.75% of the balance, depending on term, loan amount, and LTV. HUD publishes the full structure on its FHA mortgage insurance premium page.
- How long it lasts: on a thirty-year loan above 90% LTV, the annual premium runs for the full term. At or below 90% LTV, it ends after eleven years.
Because an FHA cash-out caps at 80%, the shorter eleven-year schedule is the one a cash-out borrower normally sees. That is a fact about the program, not a price quote. Your actual figures come from your Loan Estimate.
Conventional works differently. Private mortgage insurance generally attaches when your LTV is above 80%. A conventional cash-out at 80% or below usually carries none. That is why a strong-credit borrower often comes out ahead on conventional. There is no premium layer to carry, and FHA’s upfront premium is a cost it cannot match.
The honest summary: FHA wins on flexibility. Conventional often wins on cost when your credit is strong. Mid-tier credit is where the answer really depends on the quotes.
FHA vs. Conventional Cash-Out at a Glance
| Factor | FHA Cash-Out | Conventional Cash-Out |
|---|---|---|
| Max LTV, primary home | 80% | 80% (1 unit) |
| Occupancy | Owner-occupied only | Can include second homes |
| Credit flexibility | Guidelines vary by scenario; we review options through our network | Tiered; stronger scores price better |
| Mortgage insurance | Upfront plus annual, every loan | Generally none at 80% or below |
| What it means for you | Easier approval, extra cost layer | Cheaper if credit is strong |
Conventional cash-out can reach second homes and rentals, usually at lower LTVs. FHA is for the home you live in, full stop. If you came here asking about a rental, that is the one-sentence answer: occupancy decides the leverage.
Three Borrowers, Three Different Answers
Run these as pictures, not quotes. No dollar figures, just how the pieces fit.
The mid-credit borrower. Picture a homeowner with a score in the low 600s and 45% equity. Conventional pricing came back high because of the credit tier. FHA’s premiums do not move with credit score. FHA is worth a full side-by-side. It may well win here.
The high-debt-ratio borrower. Say you carry car loans and card balances, and your total DTI sits above what conventional guidelines like. FHA’s ratio ceiling reaches higher with documented compensating factors. If conventional declined you on ratios, FHA may be the only route that fits. But the extra cash, if used to pay off those debts, should lower the ratio the lender sees.
The strong-credit borrower. Consider a homeowner with a high score and 40% equity, borrowing at 70% LTV. Conventional needs no mortgage insurance at that leverage. FHA adds the upfront premium and the annual one. Stay conventional. FHA would only add cost. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.
Should You Stay FHA, Switch, or Skip the Cash-Out?
Use this as a quick test. FHA is likely worth a serious look if:
- Conventional declined you, or priced you in a low credit tier.
- Your DTI is the obstacle, not your equity.
- You expect to stay in the home long enough for the insurance cost to be spread out.
Stay conventional, or skip the cash-out, if:
- Your credit is strong and you would borrow at 80% LTV or below.
- You plan to move in a few years. The upfront premium needs time to pay for itself.
- You own the home as a second home or rental. FHA will not work. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
If you already have an FHA loan, the question changes. You are no longer choosing between FHA and conventional. You are choosing between keeping your loan, streamlining it, or replacing it with a cash-out.
Keeping it makes sense if you do not need the cash. A Streamline can improve your terms with no appraisal, but it puts no money in your hand. A cash-out is the only one of the three that does. It also has to meet the 80% cap, the 12 months of ownership and occupancy, and the payment history rules covered below. Whichever you choose, FHA mortgage insurance continues on the new loan.
The Catch Nobody Mentions: You Replace the Whole Loan
A cash-out refinance does not borrow against your old mortgage. It replaces it. Every dollar of your existing balance moves onto the new loan’s terms. That includes the part you were not touching.
So if your current mortgage has a low rate, a cash-out gives it up. The new terms apply to the whole balance, not just the cash. The CFPB’s research blog on cash-out refinances notes that cash-out borrowers are likely to see higher payments and longer terms, and that higher pricing on a cash-out can raise borrowing costs sharply compared with a home equity loan or HELOC, which leave the first mortgage alone.
Here is the tradeoff in plain words. A HELOC or home equity loan sits behind your first mortgage. It can cost less when you only need a modest amount and your first mortgage is a good one. A cash-out makes more sense when your current loan is not worth protecting, or when you need a large sum at one fixed set of terms.
Debt consolidation deserves a caution. Paying off cards with your home’s equity turns unsecured debt into debt secured by the house, and that can raise your foreclosure risk. A CFPB report on cash-out refinance borrowers found their credit scores jumped after the refinance and then drifted back down. That pattern is what you would expect if the cards fill up again.
What the Lender Checks Before an FHA Cash-Out
Four things decide the outcome. Miss one and the file stalls.
1. Occupancy and ownership. The home must be your primary residence, owned and occupied for 12 months before the case number is assigned. Recent buyers are out. Wait.
2. Payment history. Expect the lender to document 12 months of on-time payments on your current mortgage. A recent late payment, forbearance, or modification means extra documentation or a delay.
3. Appraisal and equity. The appraised value sets the 80% cap. Loan balance plus any second liens must fit under it.
4. Credit and ratios. Decision score, DTI, and the new payment all get reviewed together. Hitting 80% LTV does not promise an approval or any particular amount of cash. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.
County loan limits apply too. FHA sets those by county, and they change every year, so your county’s limit is something the lender confirms on your file.
Credit events have their own clocks. HUD’s waiting periods are two years from a Chapter 7 discharge and three years from a foreclosure. Those are HUD’s rules, not a promise from any one lender.
FHA Streamline or Cash-Out? Different Tools
An FHA Streamline refinances an existing FHA loan with no appraisal and a limited credit review. It requires a net tangible benefit, and the premium continues. It does not give you cash. If you want cash, you need the cash-out.
There is also the FHA rate-and-term refinance with an appraisal, which reaches 97.75% on a principal residence occupied for the previous twelve months. It pays off your old loan and closing costs only. It is a cash-out’s cousin, but you walk away with no extra cash.
Getting Out of FHA Insurance Later
You cannot cancel FHA insurance on request when it lasts for the term. The other exit is a refinance into a conventional loan once your credit and equity support it. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.
That plan only works if your equity and score improve. Borrowers who pick FHA because their credit is rough often do plan to refinance later. It is a legitimate strategy, but it means paying a second set of closing costs. Weigh that against staying put.
Mistakes That Cost Borrowers Money
- Using the old 85% number. It stopped applying years ago. The cap is 80%.
- Assuming FHA is cheaper because it is easier. Easy approval and low cost are different things.
- Ignoring the existing loan. A cash-out replaces the whole balance, low-cost first mortgage included.
- Forgetting the second lien. A HELOC counts against the 80% CLTV.
- Comparing only one number. Put both offers side by side on the Loan Estimate. Look at the upfront insurance, the annual insurance, the closing costs, and the net cash you receive.
Frequently Asked Questions
Do I need an FHA loan already to get an FHA cash-out?
No. FHA cash-out refinances can pay off other kinds of mortgages, subject to lender guidelines. You do need to meet the occupancy, ownership, payment history, and equity rules. If your current loan is FHA, you also have the Streamline option, but it does not give you cash.
Is an FHA cash-out cheaper than a HELOC?
Not usually, if your first mortgage is in good shape. A HELOC leaves your existing loan alone, while a cash-out replaces it and adds FHA mortgage insurance. A cash-out wins when you need a large lump sum on fixed terms, or when your current loan has nothing worth protecting.
Can I use FHA cash-out money to pay off credit cards?
Yes, the proceeds can go to any purpose, subject to lender guidelines. But you convert unsecured debt into debt secured by your home. If the cards fill up again, you carry both the mortgage and new balances. Pay them off only if the spending that created them has changed.
Can I do an FHA cash-out on a rental or second home?
No. Occupancy decides it. FHA loans are for a principal residence you live in. Conventional cash-out may allow other occupancy types at lower leverage.
What if conventional declined me and FHA does too?
Look at which factor drove each decline. If it was credit, a few months of cleanup may change the answer. If it was equity or the 12-month history, time fixes it. A smaller home equity loan or HELOC may fit when the first mortgage is worth keeping. Every program is subject to lender guidelines and full file review.
Next Step
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. Bring your current loan details and your target cash amount, and request a quote at Lendmire or call 828-256-2183. Nothing here is a commitment to lend. Pricing, eligibility, and loan limits depend on your file, your county, and the lender.
Remember the main rule: FHA cash-out is a credit-flexibility tool, not a way to borrow more.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage brokerage serving homeowners and home buyers in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending channels; Lendmire brokers the financing and the lender underwrites each application. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. HUD Mortgagee Letter 2019-11
2. HUD press release on cash-out lending
3. Fannie Mae Eligibility Matrix
4. HUD Mortgagee Letter 2023-05
5. HUD FHA Answers: FHA mortgage insurance premium structure
6. CFPB’s research blog on cash-out refinances
7. CFPB: CFPB Report Finds Cash Out Mortgage Refinance Borrowers Improve Credit Scores
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: How to Move a Declined Conventional Cash-Out to an FHA Cash-Out · How Much Cash a VA Cash-Out Adds Over Your FHA or Conventional Loan · Can You Get an FHA Cash-Out After a Conventional Denial?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
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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.