The Quick Read: On a home with no mortgage, the choice mostly comes down to what you would rather pay for: insurance or credit strength. FHA accepts more credit blemishes and higher debt loads, but it charges mortgage insurance for years. Conventional can skip mortgage insurance at moderate leverage, but it asks more of your credit and your debt ratios. Neither option lets you borrow meaningfully more equity than the other on a one-unit primary residence.
The honest answer, by borrower. FHA is built for the owner whose credit has bruises, whose debt-to-income is stretched, or whose file needs documented compensating factors to clear. Conventional is built for the owner with solid credit and manageable debts who would rather not carry a monthly insurance charge. If your credit is strong, conventional usually deserves the first look. If your credit is the obstacle, FHA is often the only one of the two that works. The gray zone is the middle: decent credit, a fair amount of other debt. That is where the comparison below earns its keep.
Key Takeaways
- A paid-off home can be refinanced as a cash-out loan under both FHA and conventional guidelines. It is a new first mortgage on a property that has none.
- FHA cash-out reaches 80% LTV on a home you have owned and occupied for 12 months before the case number.
- FHA charges an upfront premium of 1.75% of the base loan, plus an annual premium. At or below 90% LTV, the annual premium ends after eleven years.
- Conventional pricing and eligibility lean heavily on credit score. FHA insurance is not priced to your score.
- FHA cash-out is for a principal residence only. Conventional allows other occupancies, at lower leverage.
What “Cash-Out” Means When Nothing Is Owed
A cash-out refinance normally pays off an old loan and hands you the leftover equity. On a paid-off home there is no old loan to pay. Everything you borrow is cash to you, and the new loan sits in first position.
That sounds like it should make things simpler. In some ways it does. A free-and-clear home skips the mortgage payment history test, since there is no payment history to check. Both FHA and conventional treat a loan on a free-and-clear property as a cash-out transaction. HUD Mortgagee Letter 2020-30 quotes handbook language confirming that properties owned free and clear may be refinanced this way.
You still have to qualify on credit, income and occupancy. And you are creating a monthly obligation where there was none. That deserves more thought than any program comparison.
Side-by-Side
| Factor | FHA Cash-Out | Conventional Cash-Out |
|---|---|---|
| Max leverage | 80% LTV | Similar on a one-unit home; lower on 2-4 units |
| Credit posture | Decision score from 580 in our network | Stronger credit expected |
| Mortgage insurance | Upfront 1.75% plus annual premium | Generally none at 80% LTV or below |
| Ratios | 31/43 base; up to 40/50 with factors | Automated finding; tighter at high DTI |
| Occupancy | Principal residence only | Other occupancies allowed, lower caps |
| Ownership test | Owned and occupied 12 months | Title held six months, with exceptions |
| Exit from insurance | Refinance or payoff | PMI cancels at set equity levels |
Two cautions on reading this table. Every figure is a guideline subject to lender review, and individual wholesale lenders can set stricter floors than the program minimums. Also, “generally none” for conventional insurance is not the same as “cheaper.” Conventional loans carry pricing adjustments that move with credit score and leverage. Those adjustments are built into the loan’s cost rather than shown as an insurance line, which is why a clean-looking conventional quote can still cost more than an FHA quote for a borrower with weaker credit.
How FHA Insurance Works on a Cash-Out
FHA insurance has two parts. The upfront premium is 1.75% of the base loan, usually financed into the balance. The annual premium is collected monthly. Across the wholesale programs Lendmire places FHA files with, the annual premium runs between 0.15% and 0.75% of the balance, depending on term, loan amount and LTV.
Duration is where equity matters. On a thirty-year loan above 90% LTV, the annual premium lasts the full term. At or below 90%, it ends after eleven years. Because FHA cash-out stops at 80% LTV, a cash-out borrower typically lands in the eleven-year bracket.
That is better than the old “FHA insurance is forever” reputation suggests. It is still a long time. Eleven years of premium is a real cost, and you cannot cancel it by building equity along the way. HUD’s premium page explains that for newer FHA cases, insurance ends only when the mortgage is paid in full before maturity. In practice, the usual way out is refinancing into a conventional loan once your credit and equity allow it.
How Conventional “No Insurance” Actually Prices
At 80% LTV or below, the standard private mortgage insurance trigger does not apply. That is the headline advantage of conventional on a paid-off home. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.
Here is the catch. Conventional lenders price the loan on a grid. Credit score sits on one axis and leverage on the other. Cash-out refinances generally land in a costlier spot on that grid than purchases or rate-and-term refinances at the same score. A borrower with strong credit barely feels it. A borrower near the minimum can find the cost of “no insurance” rivals the insurance it avoided.
Conventional also leans on the automated underwriting finding. Fannie Mae’s Selling Guide on cash-out refinances adds reserve requirements when debt-to-income climbs high on automated files. Heavy existing debt can therefore cost you on the conventional side in ways it does not on FHA. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.
When FHA Is the Better Fit
FHA tends to win in these situations:
- Credit has dents. A recent late payment, a thin file or a score in the lower tiers can sink a conventional cash-out or price it badly. FHA’s insurance does not move with your score, so the cost stays predictable. The programs Lendmire works with start at a 580 decision score.
- Debt-to-income is high. The base ratios are 31/43. Documented compensating factors, such as reserves or a strong residual income, can reach 40/50 at the top tier. Conventional can be less forgiving once other debts pile up.
- You plan to refinance again. If you expect your credit to improve in a few years, FHA can be a bridge. The insurance is a cost you can exit later by refinancing. That only works if you will actually do it, and if equity and credit cooperate when the time comes.
- A past forbearance or credit event is behind you. FHA’s seasoning rules are defined, and cash-out after forbearance requires 12 consecutive on-time payments, according to HUD. HUD’s waiting periods after a chapter 7 discharge (two years) or foreclosure (three years) are also HUD rules, not network promises.
The flip point: if your score would qualify you for conventional at a sensible cost, FHA’s years of premium are probably the more expensive path. FHA earns its place when credit is the problem, not when insurance is merely unfamiliar.
When Conventional Is the Better Fit
Conventional tends to win here:
- Credit is solid. Good scores earn favorable pricing and open the no-insurance door at 80% LTV or below. This is the profile where FHA’s premium is hardest to justify.
- You want flexibility on how long you keep the loan. With no FHA-style insurance, there is no premium clock to outlast. If your leverage ever pushes into PMI territory, that insurance can be cancelled. The CFPB explains that you can request cancellation when the balance is scheduled to reach 80% of the home’s original value, and that termination is automatic at 78% if the loan is current.
- The property isn’t a standard primary residence. FHA cash-out is for a principal residence. If the home is a second home, conventional is the lane, at lower leverage. A rental is a different category of financing and outside this article.
- You are borrowing a moderate amount. The smaller the draw, the less leverage matters, and the more credit-based pricing dominates the comparison.
- The title timing is unusual. Conventional guidelines include exceptions to the six-month title wait, such as inheritance and certain legal awards. Confirm the current text with your lender, since details change.
The flip point: if your credit is fair and your debts are heavy, conventional can quietly become the expensive option. A pricing adjustment that stacks on top of a stretched ratio is less visible than an insurance line, but it is still money.
Practitioner Note: Where Files Get Stuck
On paid-off homes, the two snags that show up most often are not credit or insurance. They are occupancy and appraisal. FHA wants twelve months of ownership and occupancy before the case number, and borrowers who bought outright and moved in recently sometimes miss that window by a few weeks. Meanwhile, the appraisal sets the value the LTV cap applies to. If the number comes in under your expectation, the cash available shrinks on either program. Before comparing programs, price out the equity you can reach at the appraised value you can reasonably defend.
Common Myths
“FHA lets you borrow more equity.” Not at the cash-out caps. FHA reaches 80% LTV. Conventional on a one-unit primary residence reaches a comparable level. Older sources that show a higher FHA figure are out of date. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
“FHA insurance drops off at 20% equity.” On newer loans, duration depends on your original LTV, not on equity built later.
“No mortgage insurance means cheaper.” Credit-based pricing on conventional can offset the savings for lower-score borrowers.
“A paid-off home can’t be cash-out refinanced.” It can, on both programs.
The Risk Nobody Puts in the Comparison
Putting a mortgage on a home you own outright is a significant step, whichever program you choose. You are turning equity into debt that must be repaid, and the home secures it. The CFPB’s guide to using home equity notes that lenders on these products typically want you to keep a cushion of equity, and it frames cash-out as a loan to be repaid.
A common reason borrowers take cash out is paying other debts. That can make sense. It also swaps unsecured debt for debt tied to your house. If you are weighing that move, Lendmire’s piece FHA Cash-Out vs Conventional Cash-Out to Pay Off Credit Cards goes through the tradeoff in more detail.
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
Cash-out refinance: A new mortgage that gives you cash from your home’s equity. On a paid-off home, the whole loan amount is cash to you.
LTV (loan-to-value): The loan balance divided by the home’s appraised value, shown as a percentage.
MIP (mortgage insurance premium): FHA’s insurance, paid as an upfront charge plus a monthly annual premium.
PMI (private mortgage insurance): Insurance on conventional loans, generally required when equity is under 20%. It can be cancelled at set thresholds.
DTI (debt-to-income): Your monthly debts, including the new housing payment, divided by your gross monthly income.
Seasoning: The time you must own, occupy or hold a loan before a program allows a cash-out.
A Balanced Verdict
Strong credit and ordinary debts point to conventional. The no-insurance structure and the cancellation rights are worth having when the pricing grid treats you well. Bruised credit or stretched ratios point to FHA, where the insurance buys you flexibility, and where a later refinance can end the premium.
In the middle, run both. Ask for the full cost picture of each, including the financed upfront premium on the FHA side and the credit-based adjustments on the conventional side. Then ask a harder question: how long will you keep this loan? A short horizon favors whichever option costs less up front. A long horizon magnifies insurance on one side and pricing adjustments on the other. And if the answer to “why am I borrowing?” is unclear, hold off on picking a program.
If you are weighing a cash-out refinance on a home you own outright, Lendmire can help you compare the programs and the equity each one reaches. Details start with the FHA cash-out refinance program page, and every figure here remains subject to lender guidelines and full file review. This is not a commitment to lend.
Frequently Asked Questions
Can I do an FHA cash-out on a house I own with no mortgage?
Yes, if it is your principal residence and you have owned and occupied it for the required period before the case number, which is 12 months. A paid-off home skips the mortgage payment history check. You still need to meet credit, income and appraisal requirements, subject to lender guidelines.
Do I pay mortgage insurance on a conventional cash-out of a paid-off home?
Usually not at 80% LTV or below, because the standard PMI trigger applies when equity is under 20%. Borrowing above that level can bring PMI in. Conventional cost still varies with credit score and leverage, so no insurance line does not mean no cost difference.
Can I get out of FHA mortgage insurance later?
Generally only by paying off the loan, most often through a refinance into conventional. HUD states that for newer FHA cases, insurance ends only on payoff before maturity. On a cash-out at or below 90% LTV, the annual premium ends after eleven years.
Does FHA allow more cash out than conventional?
No, not on a one-unit primary residence. FHA cash-out stops at 80% LTV, and conventional is comparable on that property type. Conventional caps drop for multi-unit and manufactured homes, which is a separate question from FHA’s occupancy limits. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.
Is a lower credit score always a reason to choose FHA?
Not always. FHA’s insurance does not move with your score, which helps lower-score borrowers. But FHA still involves 1.75% upfront and years of annual premium. With fair-to-good credit and modest debts, a conventional quote can come out lower overall. Compare both on your actual file.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage broker licensed for consumer lending in 16 states. Lendmire arranges FHA, VA, conventional and jumbo purchase and refinance loans through wholesale lenders; every file is underwritten by the lender under the applicable program guidelines. 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 Mortgagee Letter 2020-30
2. HUD: Single Family Mortgage Insurance Premiums
3. Fannie Mae Selling Guide: Cash-Out Refinance Transactions
4. CFPB: When can I remove private mortgage insurance (PMI) from my loan?
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 and Conventional Cash-Out Credit Requirements for a Lower Score Tier · Is an FHA Cash-Out Easier Than Conventional If You Want Out of FHA? · How a Low Appraisal Cuts an FHA Cash-Out on a Paid-Off Home
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
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.