FHA Cash-Out Refinance Requirements to Pay Off a HELOC Whose Draw Period Ended

The Quick Read: An FHA cash-out refinance can pay off a HELOC after the draw period ends, as long as the home is your owned and lived-in primary residence. It replaces both your first mortgage and the HELOC with one new first mortgage. You also need on-time mortgage payments, including on the HELOC, and a file that passes credit and income review.

What Happens When the Draw Period Ends

When the draw period ends, you can no longer borrow from the line. You enter the repayment period. The CFPB explains that the lender may set a schedule to repay the full balance, often over ten or 20 years. Some plans make the whole balance due as soon as repayment begins.

A payment that was manageable at interest-only suddenly isn’t. Or a balloon is coming due, and a deadline is now on the calendar.

Here is the good news. The draw end date is not a refinance trigger or a waiting period. The tests below look at ownership, occupancy, payment history, equity, credit, and income. A closed line is judged the same way an open one is.

How the FHA Cash-Out Refinance Works

A cash-out refinance replaces your current mortgage with a new, larger one. The difference between the new loan and what you owed comes to you as cash. When you use it to pay off a HELOC, the new loan retires both the first mortgage and the line. You leave with one lien and one payment.

Across the wholesale programs we place FHA files with, the cash-out version reaches 80% of the home’s value on a home you have owned and occupied for 12 months before the case number.

A few points surprise people:

• You don’t need an FHA loan today. A conventional first mortgage can be refinanced into FHA.
• A home owned free and clear can also be refinanced as cash-out.
• Standard FHA cash-out is for a principal residence only, so second homes and rentals don’t qualify.
• The FHA Streamline is a different product. It refinances an existing FHA loan with no cash out, so it can’t pay off a HELOC using equity.

Test 1: Ownership and occupancy

At least one borrower must have owned and lived in the home for the 12 months before the case number. There is one narrow exception worth knowing: a home you inherited may be treated differently from the standard 12-month test, but only if you did not rent it out after inheriting it. If you did rent it, the 12-month occupancy requirement applies before you can qualify. Ask your loan officer how the lender applies this.

Test 2: Payment history

HUD Mortgagee Letter 2020-30 excerpts the handbook rule for cash-out payment history. The lender must document that all payments on all your mortgages were made within the month due for the prior 12 months, or since the loans were obtained, whichever is less.

The same letter says a cash-out file is moved to manual underwriting if any mortgage trade line shows a delinquency in the lookback window. It specifically includes “mortgage line-of-credit payments.” Your HELOC is part of that record. Ending the draw period doesn’t wipe it clean.

Manual underwriting is not a denial. It is a stricter review, and it often asks for more documentation and stronger ratios. After a forbearance, HUD’s letter calls for 12 consecutive on-time payments before a cash-out. That rule came out of the COVID era, so confirm current treatment with your lender.

Test 3: Equity limit

HUD cut the maximum cash-out loan-to-value from 85% to 80% for case numbers assigned on or after September 1, 2019. LTV is the loan amount divided by the home’s value. The cap applies to the appraisal-supported value, so a low appraisal lowers your maximum loan directly.

The HELOC is paid off at closing, so it disappears as a separate lien. The single new first mortgage must fit under 80%. County loan limits also apply, and your loan officer can tell you the limit for your county.

Test 4: Credit and income

The file is underwritten like other FHA loans, with a credit review and a debt-to-income review. Debt-to-income, or DTI, compares your monthly debts to your monthly income. Across the wholesale programs we place FHA files with, the base ratios are 31/43 (housing and total debt) with no compensating factors. Documented compensating factors, such as strong reserves, can reach 40/50 at the top credit tier.

The credit floor in our network starts at a 580 decision score. Some lenders set higher floors than HUD requires. Everything here is subject to lender guidelines and full file review.

Key Terms Defined

Draw period: The stretch of a HELOC when you can borrow from the line, often with interest-only payments.

Repayment period: The stretch after the draw ends, when you repay the balance and can no longer borrow.

Balloon payment: A large lump sum due when the repayment term ends, sometimes the entire balance.

Cash-out refinance: A new mortgage larger than your current balance, with the difference paid to you.

LTV and CLTV: Loan-to-value (LTV) is the loan divided by the home’s value. Combined loan-to-value (CLTV) adds every loan secured by the home, such as a first mortgage plus a HELOC, and divides that total by the home’s value.

Seasoning: The waiting period or track record a lender wants before you can refinance.

Mortgage insurance premium (MIP): FHA’s insurance on the loan, paid as an upfront premium plus an annual premium billed monthly.

Subordination: An agreement that lets one lien, such as a HELOC, sit behind another in priority.

Step by Step: From Statement to Closing

1. Pull your HELOC agreement and statements. Find the draw end date, the repayment term, whether the rate is variable, whether a balloon applies, and any early-closure fee. Terms vary by plan, per the CFPB’s HELOC brochure.

2. Check your clocks. Confirm 12 months of ownership and occupancy, and clean payment records on the first mortgage and the HELOC.

3. Apply and get a case number and appraisal. The 80% cap applies to the appraised value.

4. Get the underwriting decision. This comes before anything is set for closing. With the appraisal in, the lender runs the file through automated underwriting. A recent late payment on any mortgage line, including the HELOC, can send it to a manual review instead. The file must clear this step before the loan moves toward closing.

5. Order payoff statements. Once the file is cleared, the title company gets payoff figures for the first mortgage and the HELOC, so the new loan amount can be set to cover both.

6. Review mortgage insurance. The upfront premium is 1.75% of the base loan and is usually financed. The annual premium runs between 0.15% and 0.75% of the balance, depending on term, loan amount, and LTV.

7. Close and confirm the line is closed. At closing, the new loan pays off both old liens. Any remaining proceeds come to you after costs. Make sure you get a recorded lien release and written confirmation the HELOC is closed.

You will receive a Loan Estimate and a Closing Disclosure as part of the process. Compare them line by line against what you were quoted.

Where the General Rule Breaks: Edge Cases

Recent HELOC draws. FHA’s no-cash-out refinance restricts rolling in recent HELOC advances taken for non-home purposes. That limit belongs to that product. In a cash-out loan, proceeds aren’t restricted to specific purposes, so a recently drawn line is not blocked by that test. Confirm with your lender how it applies the current handbook.

Balloon HELOCs. If the whole balance comes due when the draw ends, the refinance becomes a deadline. A late payment while you scramble can collide with the clean payment-history rule. Start early.

Keeping the HELOC. Older FHA guidance allowed a HELOC to stay in place if subordinated. Lenders may count the credit limit, not just the drawn balance, toward combined leverage. For a closed, amortizing line, ask whether the lender counts the balance or the limit.

Free-and-clear homes. These can be refinanced as cash-out. A home with only a HELOC and no first mortgage is treated however the lender classifies the line, so ask early.

A partly drawn or tiny line. The mechanics are the same. The payoff amount changes, and the new loan is still capped at 80% of value.

What This Does to Your Monthly Picture

Your new payment replaces two: the old first mortgage and the HELOC. That is simpler, but it is not automatically smaller. The new loan includes mortgage insurance, which a HELOC doesn’t carry. The new rate and term apply to the entire balance, including any low-cost first mortgage you would have otherwise kept.

On the other side, the HELOC’s payment can rise even if you borrow nothing more, since many lines are variable. A fixed payment replaces that uncertainty. The home also stays your collateral either way. The FTC warns a HELOC lender can foreclose if the line isn’t repaid as agreed.

This one is a genuine tradeoff. If your first mortgage is a very good one, giving it up to retire a modest HELOC may cost you more than it saves. Run both scenarios with your loan officer before deciding.

Why FHA Applications Stall

Three problems stall most FHA cash-out files. The first is a late payment on the HELOC, since borrowers may assume only the first mortgage counts. Another is an appraisal that lands lower than hoped, which shrinks the 80% cap just as the combined balances need room. A third is the 12-month occupancy clock, when a borrower moved in recently or rented the home after inheriting it.

Each has a fix, but it starts before you apply. Check your payment record, ask for the payoff figures, and compare them against a realistic value for the home. If the numbers don’t fit under 80%, other options exist: paying the line down first, a new HELOC, or 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. Program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.

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.

References

1. CFPB: What is a HELOC?

2. HUD Mortgagee Letter 2020-30 (Handbook 4000.1 excerpts)

3. HUD press release 19-114

4. CFPB HELOC brochure

5. FTC: Home equity loans and HELOCs