The Quick Read: No. Holding a conventional mortgage gives you no edge with an FHA cash-out refinance, and it costs you nothing either. FHA doesn’t care what kind of loan you’re paying off. Approval turns on how long you’ve owned and lived in the home, your payment history, your credit and income, and the appraised value. The real question is whether FHA fits your profile better than a conventional cash-out.
Does the Type of Loan You Have Change Anything?
No. An FHA cash-out refinance can pay off an FHA loan, a conventional loan, a VA loan, or no loan at all. HUD defines a cash-out refinance as a refinance of any mortgage, or an equity withdrawal where no mortgage exists, with proceeds not limited to specific purposes. That definition sits in HUD Handbook 4000.1.
The “you need an FHA loan first” idea comes from a different product. Only the FHA Streamline requires an existing FHA loan. The cash-out version doesn’t.
Think of it this way. The old loan is just a payoff line on the closing statement. The new lender cares about the borrower, the house, and the new loan. That’s why a conventional borrower isn’t “pre-qualified” in any sense. Across the wholesale programs Lendmire places files with, the file is reviewed fresh each time.
You can read more about the program itself on Lendmire’s FHA cash-out refinance program page.
What Does an FHA Cash-Out Actually Require?
Four things drive the decision, and the first two are pass/fail.
- Ownership and occupancy. The home must be your principal residence, owned and occupied for 12 months before the case number is assigned. Second homes and rentals don’t qualify for FHA. Occupancy decides the leverage, and conventional cash-out can reach other property types where FHA can’t.
- Payment history. The lender documents that your mortgage payments were made within the month due over the prior 12 months. If the loan isn’t on your credit report, expect a verification of mortgage or bank statements.
- Credit and income. Files run through FHA’s automated scorecard. A “Refer” result means a loan underwriter reviews the file by hand. The wholesale programs Lendmire works with start at a 580 decision score for the 3.5% minimum-investment purchase structure, and lenders can set their own floors above HUD’s.
- Appraised value. FHA cash-out reaches 80% loan-to-value on the home. Any remaining second lien counts toward that cap.
If your current mortgage payment history has a recent slip, that can be a problem on cash-out specifically. HUD has clarified how late payments are handled in cash-out and manually underwritten files, as shown in a handbook update. All of this is subject to lender guidelines and full file review.
What Is the 80% Cap, and Is It Still 85%?
It’s 80%. The old 85% limit is gone. HUD lowered the cash-out cap for case numbers on or after September 1, 2019, as recorded in the handbook transmittal.
Eighty percent means you keep at least 20% equity in the home after the refinance. The CFPB notes in its guide to using home equity that lenders commonly expect you to keep 10% to 20% equity on cash-out, HELOC, or home equity products. FHA sits at the stricter end of that range.
Reaching 80% doesn’t mean approval. The lender still reviews your history, credit, income, the new payment, and the appraisal.
Where FHA May Fit Better Than Conventional
FHA cash-out tends to help in a narrow set of situations. It isn’t a general upgrade.
| Factor | FHA cash-out | Conventional cash-out |
|---|---|---|
| Credit flexibility | Often wider | Often tighter |
| Debt load | Documented factors can stretch ratios | Stricter on high debt |
| Mortgage insurance | Upfront and annual premium | Usually none at 20%+ equity |
| Occupancy | Primary residence only | Other property types possible |
| Leverage on cash-out | 80% | Varies by program |
Here’s the catch. A weaker profile may get through FHA when conventional says no, but you pay for that flexibility through mortgage insurance. FHA charges an upfront premium of 1.75% of the base loan, usually financed into the balance, plus an annual premium. The annual premium runs between 0.15% and 0.75% of the balance depending on term, loan amount, and LTV. On a thirty-year loan above 90% LTV it lasts the life of the loan. At or below 90% LTV it ends after eleven years. A cash-out at 80% LTV falls in that second group.
A conventional borrower with 20% or more equity after the refinance typically wouldn’t carry private mortgage insurance at all. That’s the main cost gap.
Three Borrower Profiles
Picture a homeowner with a strong credit profile, modest debts, and a conventional loan with plenty of equity. Conventional cash-out is likely the cheaper path because there’s no ongoing mortgage insurance. FHA adds cost without adding anything this borrower needs.
Now say a homeowner has credit that’s been rebuilding, with a few dings but a clean 12 months on the mortgage. Conventional guidelines may be tight for this file. FHA, with its wider credit treatment, may be the only cash-out structure that works. The insurance cost buys access.
Consider a third borrower with solid credit but heavy monthly debts after a recent expense. Debt-to-income is where files break. FHA’s base ratio pair is 31/43 (housing and total), and documented compensating factors can reach 40/50 at the top tier. The automated finding governs most files. A conventional lender may cap the ratio lower. For this borrower FHA may genuinely qualify better, but that’s about the ratios, not the old loan.
What Does the Conventional Borrower Give Up?
This is the part most comparison pages skip. A cash-out replaces your entire first mortgage. If you hold a low-rate conventional loan, you lose it completely, even if you only need a small amount of cash.
The CFPB describes the mechanics plainly: you take a larger mortgage, pay off the current one, and keep the difference. Terms change, the payoff period may lengthen, and the payment may rise. See the CFPB’s research on cash-out borrowers. The same research notes that HELOCs and home equity loans leave the first mortgage in place.
So before FHA versus conventional, ask a prior question. Does a cash-out refinance make sense at all? If your existing loan is attractive and you need a moderate sum, a second lien may preserve it.
When FHA Cash-Out Is the Wrong Move
Skip it in these cases:
- You’d qualify for conventional with room to spare and have 20%+ equity left after closing.
- You plan to keep the loan for many years and the insurance would run its full course.
- The property isn’t your primary residence.
- You’d be converting unsecured debt into mortgage debt without a plan to avoid running those balances up again. The CFPB has warned that paying non-mortgage debts with mortgage debt can raise foreclosure risk, since a missed mortgage payment can cost you the home and a missed card payment generally won’t. See its report on cash-out and non-mortgage debt.
Honestly, the FHA route is often a bridge. A borrower whose credit improves later may be able to refinance into conventional and shed the annual premium. That exit is worth planning for, though it isn’t guaranteed and depends on future equity and credit.
A Simple Way to Compare the Two
Don’t compare on one number. Line up these four items for each option:
1. The new loan balance, including the financed upfront premium on FHA.
2. The ongoing monthly cost, including any mortgage insurance.
3. How long you expect to keep the loan.
4. What happens to your current first mortgage.
The longer you hold the loan, the more the annual premium matters. The shorter the hold, the more upfront costs matter. Ask each lender for a Loan Estimate on both structures and compare them side by side. Closing costs apply to the full new balance either way, and a “no-closing-cost” structure just moves those costs into the loan balance or the pricing.
What Can Disqualify a Cash-Out File?
- Less than 12 months of ownership and occupancy, unless an exception such as inheritance applies.
- Late payments on the existing mortgage within the review window.
- A property that isn’t a principal residence.
- Combined liens above the 80% cap.
- Credit events inside HUD’s waiting periods, which are two years from a Chapter 7 discharge and three years from a foreclosure. Those are HUD rules, not a promise from any one lender.
- A scorecard “Refer” result without enough documented support to pass manual review.
Inherited homes are a special case. The 12-month occupancy rule can be waived if the borrower hasn’t treated the property as a rental since inheriting it. Confirm the current wording in the HUD handbook, which is revised periodically.
Key Terms Defined
Cash-out refinance: A new, larger mortgage that pays off the old one and puts the difference in your hands as cash.
LTV (loan-to-value): The loan balance divided by the home’s appraised value.
MIP (mortgage insurance premium): FHA’s insurance charge, paid upfront and annually.
Streamline refinance: An FHA-to-FHA refinance with limited review, not available for conventional loans.
Seasoning: The length of time you’ve owned the home or made payments before a refinance.
Frequently Asked Questions
Do I need an existing FHA loan to get an FHA cash-out refinance?
No. The cash-out version can pay off conventional, VA, and other loans, or apply to a home with no mortgage. Only the Streamline refinance requires an existing FHA loan.
If I’m approved for conventional, should I still look at FHA?
Only if the numbers favor it. A strong borrower with 20% equity left usually avoids mortgage insurance on conventional, which can make it cheaper. FHA may still be worth a Loan Estimate if your debt load is high or your credit sits near a conventional cutoff.
How much equity do I need to keep?
FHA cash-out reaches 80% LTV, so you keep at least 20% equity. Any remaining second lien counts toward that limit. Lenders can be stricter than the program maximum.
Does FHA cash-out cost more than conventional?
Usually yes, because of mortgage insurance. FHA charges a financed upfront premium of 1.75% and an annual premium that depends on term, amount, and LTV. Conventional borrowers with 20%+ equity typically skip that. Total cost depends on how long you keep the loan.
Can I use FHA cash-out on a second home or rental?
No. FHA cash-out is for a principal residence you’ve owned and lived in for 12 months. Occupancy decides the leverage, and other property types need a different program.
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. Everything above is subject to lender guidelines and full file review, and nothing here is a commitment to lend. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
2. HUD Handbook 4000.1 Update 15 transmittal
3. HUD Handbook 4000.1 Update 7.5 transmittal
4. CFPB guide to using home equity
5. CFPB Office of Research, cash-out refinances
6. CFPB: CFPB Cash Out Refinances and Paydown Behavior of Non Mortgage Debt Balances
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 Time a VA Cash-Out When Leaving a Conventional or FHA Loan · Can You Get an FHA Cash-Out After a Conventional Denial? · Can a Conventional or FHA Borrower Do a VA Cash-Out in Year One?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
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.