The Quick Read: For a borrower with a thinner credit file, FHA is usually the easier path to qualify, and conventional is often the cheaper path to keep. Both reach about 80% of the home’s value on a cash-out, so the equity you can pull is similar. The real differences are who gets approved and what the loan costs over time. Mortgage insurance is the biggest of those costs. Final eligibility depends on lender guidelines and a full file review.
Here is the honest version. FHA suits the homeowner whose score is modest, whose file has a recent blemish, or whose debts run high against income. Conventional suits the homeowner who clears the credit bar with room to spare and plans to hold the loan for years. Many borrowers sit between those two. For them, the decision is about total cost, not just approval.
What “Thinner Credit” Actually Means
Thinner credit is not one thing. It shows up in several ways, and each one affects the two loans differently.
- A lower score. The most common case. Conventional pricing tends to get worse as scores fall.
- A short history. Few years of credit, even with a decent score.
- Few accounts. Only one or two cards or loans on file.
- Recent late payments or collections. Underwriters look at how recent they are and whether they are explained or resolved.
- High card balances. Utilization drags scores down, and cash-out funds are often used to pay those balances.
A low score with a clean recent history reads very differently from a decent score with a late payment last year. Know which one describes you before you compare programs.
Side-by-Side
Across the wholesale programs Lendmire places FHA files with, here is how the two paths line up. Conventional rows describe general agency-style behavior, not a specific lender’s rules.
| Factor | FHA Cash-Out | Conventional Cash-Out |
|---|---|---|
| Maximum leverage | 80% LTV | About 80% LTV on a primary home |
| Credit floor | Starts at a 580 decision score through this network | Higher bar in practice; varies by lender |
| Mortgage insurance | Upfront premium plus annual premium | Private insurance may apply, based on final LTV |
| Insurance duration | Lasts the term above 90% LTV; ends after 11 years at or below | Generally removable once equity builds |
| Occupancy | Owner-occupied primary residence | Primary residence at the top leverage tier |
| Ownership history | Owned and occupied 12 months before the case number | Title seasoning applies; confirm with the lender |
| Debt ratios | Base 31/43; up to 40/50 with documented factors | Driven mainly by the automated underwriting finding |
| Documentation | Full file review, payment history scrutiny | Full file review, reserves may matter more |
The 80% figure on the FHA side reflects a 2019 change. Older web pages still show 85%, but HUD’s Handbook 4000.1 update cut FHA cash-out to 80% of value. County loan limits apply to both products.
Eligibility Versus Cost
Qualifying and affording are two separate questions. Mixing them up is a common mistake thin-file borrowers make.
FHA is built to approve a wider range of files. Its rules focus on payment history, debt ratios and the automated finding rather than on a high score alone. That is why it is often the practical answer when the score is modest. The FHA program through this network starts at a 580 decision score, and some lenders set a higher floor than that. A score that clears the program minimum can still be declined by a particular lender. Program rules and lender rules are different things.
Conventional loans work differently. Fannie Mae’s loan-level price adjustment matrix shows that conventional pricing is adjusted for credit score, loan purpose and occupancy, while FHA loans are generally excluded from those adjustments. In plain terms, a lower score can still get you a conventional approval, but it can cost noticeably more than it would for a stronger file. Approval and affordability part ways.
The Mortgage Insurance Trade-Off
This is where the long-run cost lives, so it deserves its own look.
FHA charges an upfront premium of 1.75% of the base loan, usually financed into the balance. It also charges an annual premium that ranges from 0.15% to 0.75% of the balance, depending on term, loan amount and LTV. On a thirty-year loan above 90% LTV, that annual premium lasts for the whole term. At or below 90% LTV, it ends after eleven years. Because FHA cash-out tops out at 80%, many cash-out borrowers land in the shorter-duration group, but the final structure depends on the loan.
Conventional works another way. If private mortgage insurance applies at all, it can usually be removed as equity grows. The CFPB explains that a servicer must cancel on request once the balance reaches 80% of the original value, provided the borrower is current, has no junior liens and can show the value hasn’t declined. That cancellation right does not carry over to FHA. The CFPB’s Homeowners Protection Act procedures state that the Act excludes mortgage insurance under the National Housing Act.
Whether PMI applies to a new conventional cash-out at 80% depends on the final LTV, so confirm that with the lender rather than assume it. The point is that FHA insurance is a structural, longer-lasting cost. Conventional insurance, when present, tends to fade. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
When the FHA Cash-Out Is the Better Fit
FHA tends to win in these situations:
- The score is the obstacle. If conventional approval is uncertain or comes with heavy pricing adjustments, the FHA cash-out refinance program is built for that profile. Lendmire’s FHA cash-out refinance program page lays out how the leverage and occupancy rules work.
- Debt ratios run high. FHA’s ratio range stretches from 31/43 up to 40/50 with documented compensating factors. A borrower with thin credit but strong reserves or stable income can sometimes use that room.
- A recent credit event is in the past. HUD sets waiting periods after major events: two years from a chapter 7 discharge and three years from a foreclosure. Those are HUD’s rules, and lenders may add their own.
- You plan to refinance again later. If you expect your credit to improve, FHA now and a conventional refinance later is a legitimate plan. The insurance cost is the price of getting in the door.
Here’s the catch. FHA’s insurance is a real cost, and a borrower who qualifies comfortably for conventional may pay more over the life of the loan by choosing FHA out of habit.
When the Conventional Cash-Out Is the Better Fit
Conventional tends to win here:
- The score clears the bar with room to spare. Pricing adjustments shrink as credit strengthens, and the gap between the two products can reverse.
- You expect to hold the loan for years. Insurance that can be dropped beats insurance that lasts, especially over a long hold.
- Your debts are modest. A low-debt borrower with a thin history can still land a strong automated finding. Fannie Mae removed its fixed 620 reference for loans run through its automated system, so the whole profile counts more than a single cutoff. Manual underwriting and lender overlays can still set a higher floor.
- You have reserves. Cash in the bank is a compensating factor on either path, but it often does more work on conventional files.
A genuine toss-up exists in the middle. A borrower at a mid-range score with moderate debts might qualify for both. Then the question becomes how long you’ll keep the loan and how much the insurance and the pricing adjustments each cost. Ask the lender to show both structures on the Loan Estimate, since the numbers depend on your file and can’t be generalized.
A Quick Decision Guide
| Your situation | Lean toward |
|---|---|
| Modest score, recent late payment resolved | FHA |
| High debt-to-income, steady income | FHA |
| Strong score, long hold planned | Conventional |
| Thin history, low debts, solid reserves | Conventional (test both) |
| Mid-range score, moderate debts | Compare both |
| Expect big credit gains within a year or two | FHA now, revisit later |
One Practitioner Note
Across the wholesale programs Lendmire works with, the files that stall are rarely the ones with a low score. They are the ones with unexplained items: a collection nobody documented, a gap in payment history, or a large balance the borrower forgot. Pulling your own credit file and writing a short explanation for any blemish before you apply tends to help more than shaving a few points off a balance at the last minute.
What Cash-Out Does to Your Budget
A cash-out refinance replaces your whole first mortgage with a larger one. The CFPB notes that the payment may rise, the payoff time may lengthen, and the new terms replace the old ones. If you use the money to pay off credit cards, you are turning unsecured debt into debt secured by your home. That is a real risk if your income gets squeezed later. A home equity line leaves your first mortgage in place and may suit a smaller need, so it belongs in the comparison. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Key Terms Defined
Decision score: The credit score a lender uses to qualify the file when several borrowers or bureaus are involved.
LTV (loan-to-value): The loan balance divided by the home’s appraised value, shown as a percentage.
Mortgage insurance premium (MIP): FHA’s insurance charge, made up of an upfront piece and an annual piece.
PMI (private mortgage insurance): Insurance on conventional loans with limited equity, usually removable as equity grows.
Compensating factors: Strengths such as reserves or stable income that offset a weaker part of the file.
The Balanced Verdict
Neither loan is simply better. FHA is the stronger choice when approval is the main hurdle, when debts are heavy, or when a recent credit event needs room. Conventional is the stronger choice when your credit is solid enough that pricing stays reasonable and you want insurance that can eventually go away. If you sit in between, compare both structures on paper before choosing. All program details are subject to lender guidelines and full file review, and nothing here is a commitment to lend.
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 a cash-out refinance with bad credit?
Often yes on FHA, depending on the lender. The program through this network starts at a 580 decision score, and ratios and payment history matter as much as the score itself. Some lenders require more than the program minimum, so a file that fits the program can still be declined elsewhere.
Why is conventional more expensive at lower credit?
Conventional pricing is adjusted for risk factors like credit score, loan purpose and occupancy. A lower score and higher leverage raise those adjustments, so you can qualify and still pay more. FHA is generally excluded from those adjustments, which is why the cost comparison can flip.
Can FHA mortgage insurance ever be removed?
Sometimes, based on the loan. On a thirty-year loan at or below 90% LTV, the annual premium ends after eleven years. Above 90%, it lasts the term. Unlike PMI, it is not covered by the cancellation rules in the Homeowners Protection Act, so the usual path to removal is refinancing. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.
How much equity can I take out?
Both loans reach about 80% of the home’s value, with the old mortgage paid off first. What is left is your cash. County loan limits apply, and the appraisal sets the ceiling.
Can I switch from FHA to conventional later?
Yes, if you qualify at that point. Many borrowers take FHA while their credit rebuilds, then refinance once their score, debts and equity support a conventional loan. That depends on your file at the time and on the costs of a new refinance.
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.
For current guidelines, see FHA loan programs.
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References
1. HUD Handbook 4000.1 update transmittal
2. Fannie Mae loan-level price adjustment matrix
3. CFPB – When can I remove PMI?
4. CFPB – Homeowners Protection Act examination procedures
5. CFPB – Using home equity to meet financial needs
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: FHA Cash-Out vs Conventional Cash-Out for a High Debt Ratio · Can You Get an FHA Cash-Out After a Conventional Denial? · Should You Stay With an FHA Cash-Out or Move to Conventional?
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
- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.