The Quick Read: A lower score does not close the door on conventional cash-out, but it narrows it and usually makes the loan cost more. FHA is built for borrowers whose scores or credit histories are bruised, so it is often the easier path to approval. Conventional tends to win when the score is decent, the equity is solid, and you want to avoid FHA’s mortgage insurance. Neither one lets you borrow more than the other on a one-unit home you live in. Both stop at 80% of the home’s value.
Key Takeaways
- Both loans cap at 80% loan-to-value (LTV), meaning your total mortgage debt against the home’s appraised value. FHA gives you no extra cash.
- FHA’s edge is credit flexibility. Conventional’s edge is usually the absence of ongoing mortgage insurance.
- A lower score raises the cost of a conventional loan. On FHA, a lower score is less likely to lead to a decline, but FHA’s premiums apply to the whole loan.
- Lender overlays (a lender’s own rules stricter than the program’s) can change the answer on the same file.
- The right pick depends on what is dragging the score down, how long you will keep the loan, and how much equity you really have.
Side-by-Side
Here is the comparison for a one-unit home you live in. Program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.
| Factor | FHA Cash-Out | Conventional Cash-Out |
|---|---|---|
| Maximum LTV | 80% | Also 80% on a one-unit primary home |
| Credit floor | 580 decision score on programs Lendmire uses | Set by automated finding or manual grid |
| Mortgage insurance | 1.75% upfront plus annual premium | Usually none at 80% LTV or below |
| Occupancy | Principal residence only | Varies by property type |
| Ownership history | Owned and occupied 12 months | Seasoning on loan and title |
| Debt ratios | 31/43 base, up to 40/50 with factors | Weighed with score, reserves, LTV |
| County loan limits | Apply | Conforming limits apply |
| Documentation | Full income, asset, credit file | Full income, asset, credit file |
A few notes on the table. The decision score is the single credit score the lender uses to make its call. The debt ratios are housing cost and total debt, each as a share of your gross monthly income. FHA’s base pair is 31/43, and documented strengths such as cash reserves can stretch that toward 40/50 at the top tier.
Across the wholesale programs Lendmire places FHA files with, the 580 floor is the practical starting line. The Lendmire FHA cash-out refinance program page lays out the mechanics in more depth.
One more thing. Occupancy decides the leverage. If the home is a second home or a rental, FHA cash-out is not the product, and conventional rules change. This article stays on the home you live in.
How Lenders Actually Decide
Lenders do not read your score in isolation. They run the whole file through automated underwriting, a scoring system that weighs credit, income, debt, reserves, and LTV together. The system returns a finding, and a human reviews it.
That is why the same score can get different answers.
The program floor versus the lender’s floor. Every program sets a minimum. Many lenders add their own, and those overlays can sit above the program minimum. HUD’s own credit framework reaches below 580 with a lower leverage limit, per HUD Mortgagee Letter 10-29. That is HUD’s rule, not a promise from the network. Pricing and available terms vary by lender, borrower profile, property type, and full underwriting review. Check the current HUD Handbook wording before you rely on any older letter.
The automated finding. On the FHA side, the automated system leans on the full picture, so strong income or reserves can offset a thin score. On the conventional side, Fannie Mae dropped the fixed minimum score from its automated system, according to Orrick’s legal summary. The system now looks at overall risk instead. Manually underwritten files still use a score grid, and lender overlays and mortgage-insurer rules can still set minimums.
So a conventional approval below the old comfort zone is possible. It is not the norm, and it is not guaranteed.
What drags the score down matters
Not every low score is the same problem.
- High card balances. Utilization (how much of your card limits you use) hurts the score but heals fast once balances drop. A cash-out that pays the cards off can change the picture.
- Late payments. These carry more weight than balances. Recent mortgage lates are a special problem, since lenders look hard at the housing payment history on a cash-out.
- Collections or a past bankruptcy. HUD sets waiting periods after events like a chapter 7 discharge (two years) or a foreclosure (three years). Those are HUD’s rules for FHA, and a lender may add its own.
The cause changes the answer. High utilization with clean payment history often fits conventional better than the score suggests. A history of lates usually fits FHA better.
When FHA Cash-Out Is the Better Fit
FHA is the better fit when your credit history is the obstacle, not your equity. It was designed to be more forgiving of scores that conventional files struggle with.
FHA fits best in these situations.
- Your score sits near the lower end of what lenders will accept. If a conventional lender’s overlay puts you out of range, FHA’s floor of 580 on the programs Lendmire uses may still be reachable.
- Your history includes a recovered credit event. After HUD’s waiting periods pass, FHA tends to treat a rebuilt file more gently.
- Your debt load is heavy. Documented compensating factors can push FHA’s ratio ceiling to 40/50. Conventional files usually have less room.
- You have equity, but a messy file. Equity does the heavy lifting. A lender can accept a thinner credit profile when the loan is capped at 80% of value.
Be clear on the limits. FHA does not hand you more cash. HUD lowered its cash-out cap to match the conventional limit, per the HUD announcement. The old “FHA lets you borrow more” advantage is gone.
FHA also has requirements of its own. You must have owned and lived in the home for 12 months before the case number is assigned. The loan must fit under your county’s FHA loan limit, and county limits change every year. Look yours up on HUD’s tool rather than guessing.
Then there is mortgage insurance. FHA charges an upfront premium of 1.75% of the base loan, usually financed into the balance. 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 at or below 90% LTV, which includes any cash-out capped at 80%, the annual premium ends after eleven years. These are program mechanics, not a quoted price.
The premiums apply to the entire new loan, not only the cash you take out. That is the main cost of FHA’s flexibility.
When Conventional Cash-Out Is the Better Fit
Conventional is the better fit when your score is fair rather than weak and you want to avoid ongoing mortgage insurance. It rewards the borrower who is close to the line.
Conventional fits best in these situations.
- Your score is lower than ideal but your file is clean. Steady payment history, healthy reserves, and moderate debt can carry a conventional file.
- You plan to keep the loan for years. Conventional generally carries mortgage insurance only above 80% LTV. A cash-out capped at 80% usually carries none. FHA’s annual premium keeps running for years.
- You want to avoid the upfront premium. FHA’s 1.75% is financed into the balance, so you pay interest on it. Conventional has no upfront insurance at 80% LTV or below.
- Your home is not a standard one-unit primary residence. Conventional rules differ for two-to-four-unit homes and second homes, with their own limits.
Here is the catch. A lower score tends to cost more on conventional loans. Fannie Mae prices cash-out refinances using a matrix that varies by credit score and LTV, per its loan-level price adjustment matrix. Lower scores and higher LTVs sit in the more expensive cells. No consumer rate comes from that document, and the exact effect depends on the lender.
Conventional also has seasoning rules. Fannie Mae’s Selling Guide on cash-out refinance transactions sets requirements on how long the existing mortgage has been in place and how long a borrower has been on title. It also sets reserve requirements on some higher-ratio files and requires that a home listed for sale come off the market. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.
(Short version of the debate: FHA costs you more in insurance, conventional can cost you more in pricing. Which one hurts more depends on your score.)
How the Cost Compares Over Time
The honest answer is that the winner changes with your score and your time horizon. No single program is cheaper for everyone.
Picture a homeowner with a score near the FHA floor and 30% equity. Say they want cash to clear card balances. On FHA, they pay an upfront premium that gets financed, plus an annual premium for eleven years. On conventional, assuming the lender approves, they skip mortgage insurance. But a score that low sits in an expensive pricing band, if the file is approved at all.
Now picture a second homeowner with a mid-range score and a clean payment record. Conventional is probably cheaper here. The pricing penalty is smaller, and the insurance savings add up.
Run the comparison on a Loan Estimate, the standardized form a lender gives you after you apply. Put the two programs side by side and compare total cost, not the headline program.
There is also an exit path. Many borrowers take FHA now, rebuild the score, and refinance into conventional later. Once your equity passes 20%, conventional can drop mortgage insurance entirely. That plan works only if the score actually improves and the home holds its value.
Using the Cash, and What It Does to Your Score
A cash-out refinance replaces your first mortgage with a larger one. The extra amount comes to you as cash. A home equity loan or HELOC works differently. It leaves your first mortgage in place and adds a second loan.
Many borrowers use the cash to pay off cards. That can lift a score, because utilization drops. A federal study found that scores rose sharply right after the refinance and then drifted down while staying above the pre-refinance level, according to the CFPB’s research on cash-out borrowers. Card balances did not stay down for that group, though.
That is the trap. Turning card debt into mortgage debt means the debt is now secured by your home. The CFPB warns that if payments become unsustainable, converting non-mortgage debt into mortgage debt can put the home at risk of foreclosure.
So the cash-out only helps if the card spending stops. Skip it if the cards will fill back up.
Key Terms Defined
Cash-out refinance: A new, larger mortgage that pays off your old one and gives you the difference in cash.
Loan-to-value (LTV): Your loan balance divided by the home’s appraised value. Both programs here cap at 80%.
Decision score: The single credit score a lender uses to make its decision.
Overlay: A rule a lender adds on top of the program’s own minimums.
Seasoning: The waiting period tied to how long you have owned the home or held the current loan.
Mortgage insurance: Coverage that protects the lender, paid by the borrower. On FHA, it includes an upfront premium and an annual premium.
Before You Apply: A Short Checklist
- Pull your credit reports and find out why the score is low.
- Check your mortgage payment history for the past year.
- Confirm you meet the ownership and occupancy history for FHA.
- Note any other liens, since the 80% cap counts total debt against the home.
- Gather income, asset, and payoff documents.
- Ask for both programs on a Loan Estimate and compare total cost.
If a lender declines you, ask why. A decline from one lender can be an overlay, not a verdict on your file. A broker can often place the same file with a different wholesale lender, though results depend on guidelines and a full review.
One last option. If you already have an FHA loan and just want a better term, the FHA Streamline is a different product. It needs no appraisal and a limited credit review, requires a net tangible benefit, and keeps the premium going. It does not give you cash.
The Balanced Verdict
Neither program is better in the abstract. FHA is the more forgiving route for a damaged or thin credit file, and it costs you in mortgage insurance. Conventional is usually cheaper for a borrower close to the line, and it asks more of the credit profile.
The equity limit is the same on both. The real question is which obstacle you face: credit history or cost. If your history is the obstacle, start with FHA. If cost is the issue and your file is reasonably clean, start with conventional. If you sit in between, compare both on paper before you decide.
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 conventional cash-out refinance with a low credit score?
Sometimes. Automated underwriting no longer applies a fixed minimum score on Fannie Mae files, but lender overlays and mortgage-insurer rules can still set one. Manual underwriting still uses a score grid. Expect higher pricing at a lower score, and expect approval to depend on the whole file.
Does FHA let me borrow more than conventional?
No. HUD lowered the FHA cash-out cap to match the conventional limit, so both sit at 80% of appraised value on a one-unit primary home. FHA’s advantage is credit flexibility, not extra equity access.
Which has cheaper mortgage insurance?
Conventional usually has none at 80% LTV or below. FHA charges an upfront premium of 1.75%, usually financed, plus an annual premium between 0.15% and 0.75% of the balance. Compare the total cost on a Loan Estimate before choosing.
Will a cash-out refinance help my credit score?
It can, especially if you use the cash to pay down card balances. The effect tends to be strongest right after the refinance. It fades if balances climb again, and the new loan puts your home behind the debt.
What if one lender turns me down?
Ask for the reason. If it is a lender overlay, a different lender with a different floor may reach a different answer on the same file. If it is a recent mortgage late payment or a low appraisal, fix that first and reapply.
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
2. Orrick InfoBytes on Desktop Underwriter’s minimum score change
3. HUD Archives press release on the FHA cash-out cap
5. Fannie Mae Selling Guide B2-1.3-03, Cash-Out Refinance Transactions
6. CFPB’s research on cash-out borrowers
7. CFPB research on cash-out refinances and debt paydown
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: Can a Texas Homestead Move From FHA to Conventional Cash-Out Refinance? · FHA Cash-Out vs Conventional Cash-Out for a Higher-Value Home · Can a 2-4 Unit Primary Home Get an FHA Cash-Out With Thin Credit?
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
Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.