How Lenders Underwrite an FHA Cash-Out Refinance Versus Conventional Cash-Out Limits

The Quick Read: Both loan types cap cash-out at a similar share of your home’s value on a primary residence, so leverage rarely decides the choice. The difference is in how each file is judged. FHA looks hard at your payment history and tolerates more credit blemishes. Conventional looks harder at credit strength and has no upfront insurance premium. Which one fits depends on your score, your debt load, and how long you have owned the home.

FHA cash-out is for the homeowner whose credit is bruised but whose payment record on the current mortgage is clean. Conventional cash-out is for the homeowner with stronger credit who wants to avoid FHA’s mortgage insurance structure. Some homeowners will fit only one of the two. That is where the real comparison lives.

Side-by-Side

Conventional figures reflect typical Fannie Mae-style guidelines and vary by lender and property type. FHA figures are program guidelines, subject to lender review and full file evaluation.

How the Underwriter Actually Walks the File

Across the wholesale programs Lendmire works with, the order of checks is fairly consistent. First, eligibility: is this your primary home, and have you owned it long enough? Second, the mortgage history: any late payments on the loan you are paying off? Third, credit and income: does the automated finding approve, and do your debt ratios fit? Fourth, the appraisal: what is the home worth? Fifth, insurance and final conditions.

The appraisal matters more than most borrowers expect. The maximum loan is the appraised value times the cap. A low value shrinks your cash dollar for dollar. Closing costs rolled into the balance also eat into the cap, leaving less cash in your pocket.

HUD set the FHA cap at a lower loan-to-value limit in Mortgagee Letter 2019-11, cutting it from the prior level to reduce risk to the FHA insurance fund. That cap was later written into Handbook 4000.1. If you still hear that FHA cash-out goes to a higher limit than that, it is old information.

FHA Underwriting: What Gets Scrutinized

FHA cares most about the story your payments tell. Lenders generally want the mortgage you are refinancing paid within its due month for the previous 12 months. One recent late payment can stall the file even when your score looks fine.

On credit, the network’s programs start at a 580 decision score. HUD’s own rules include a lower tier, from 500 to 579 with a 10% minimum investment on a purchase, but the wholesale programs Lendmire places FHA loans with do not reach below 580. Some lenders set a higher floor of their own, and that is why one lender approves a file another declines.

On ratios, the base pair is 31/43, meaning housing costs at 31% of income and total debts at 43%. Documented compensating factors, such as strong reserves or a long job history, can stretch that to 40/50 at the top tier.

Then there is mortgage insurance. FHA charges 1.75% of the base loan upfront, which is financed into the balance. The annual premium runs from 0.15% to 0.75% of the balance, depending on term, loan amount and LTV. On a thirty-year loan above 90% LTV, it lasts the full term, while at or below 90% LTV it ends after eleven years. Because FHA cash-out tops out at 80% LTV, the eleven-year ending is the one that applies to a thirty-year cash-out loan. That is a program fact, not a price quote. Every figure here varies by lender and program, and guidelines, property type, leverage and credit profile all apply.

FHA is for your principal residence only. A non-occupant co-borrower can help on a purchase, but standard cash-out is built around a home you live in. You must also have owned and occupied it for 12 months before the case number. County loan limits apply.

Conventional Underwriting: What Gets Scrutinized

Conventional underwriting leans on credit strength and the automated system’s verdict. Cleaner credit and lower debt ratios open the door. Reserves, meaning savings left after closing, can be required, especially when your debt-to-income is on the high side.

The ownership clock is shorter. Under the Fannie Mae Selling Guide, at least one borrower generally must have held the property six months before the new loan. Exceptions exist for delayed financing, where a recent all-cash buyer can pull money out sooner, and for property held in certain trusts. Check the current guide, since lender versions differ.

Conventional loans also flex by property. Second homes, investment properties and 2-4 unit buildings get lower caps than a one-unit primary home. Manufactured homes are lower still. Private mortgage insurance applies only above 80% LTV, so a cash-out at the cap generally avoids it.

When FHA Is the Better Fit

FHA tends to win in these situations:

• Your credit score sits in the lower range, but your recent mortgage payments are spotless.
• Your debt ratios are heavy, and you have documented strengths such as reserves to offset them.
• You are past a credit event, and HUD’s waiting periods, two years from a chapter 7 discharge and three years from a foreclosure, have run. Those are HUD’s rules, not a promise from any lender, and a lender may set stricter terms of its own.
• You have lived in the home 12 months and plan to stay.

The tradeoff is the insurance structure. You pay the upfront premium on top of the annual one, and the loan must fit within county limits.

When Conventional Is the Better Fit

Conventional tends to win in these situations:

• Your credit is strong, and you want to skip FHA’s upfront premium.
• You have owned the home six months or more but not yet 12.
• The property is a second home, or you are comfortable with a lower cap on a multi-unit building.
• Your loan amount runs past FHA’s county limits.

The tradeoff is stricter credit and ratio expectations. If your score or debt load is borderline, conventional can fall apart where FHA holds together.

One Profile, Two Outcomes

Picture a homeowner with a score in the low 600s, a mortgage paid on time for two years, and debts that push total ratios near 48%. A conventional file may stall on the debt load. FHA, with documented compensating factors and a clean history, can still be reviewed under its higher ratio tiers.

Now flip it. A homeowner with a score well into the 700s, modest debts, and eight months in the home fails FHA’s 12-month rule but meets conventional’s six-month clock. Same equity, different door.

Neither borrower is guaranteed anything. Every file goes through full lender review.

Why Files Stall

Common reasons cash-out files hit trouble:

• A late payment inside the past 12 months (more damaging on FHA).
• An appraisal that comes in below expectations and shrinks the loan cap.
• Rolled-in closing costs that leave less cash than planned.
• An ownership clock that has not yet run.
• Debt ratios just over the limit with no documented offset.

Prepare recent pay stubs, bank statements, and a clean record of mortgage payments before you apply. A broker who shops several wholesale lenders can match your profile to the program whose guidelines fit best, since the right program for your situation depends on score, leverage need and documentation.

Before You Pull Equity

Cash-out replaces your current mortgage with a larger one. The CFPB notes that, unlike a home equity loan or HELOC, it replaces the original loan rather than adding to it. A bigger balance can lengthen your payoff time and raise your monthly obligation.

A Balanced Verdict

Neither loan is simply better. On a primary home, both cap leverage in similar territory, so the decision comes down to credit, ratios, timing and insurance. FHA forgives more credit history but wants a spotless recent mortgage record and 12 months in the home. Conventional rewards strong credit and moves on a shorter ownership clock.

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. Qualification is subject to lender guidelines and full file review, and nothing here is a commitment to lend.

Key Terms Defined

Adjusted value: the appraised value FHA uses, after certain adjustments, to set your maximum loan.

LTV and CLTV: loan-to-value is your loan divided by the home’s value; combined LTV adds any second loan.

Seasoning: the waiting period you must own, or hold a loan, before refinancing.

Compensating factors: documented strengths, like savings or steady income, that offset a weaker part of your file.

Overlay: a lender’s own rule that is stricter than the program’s minimum.

For your own numbers, request a scenario review with Lendmire.

For current guidelines and terms, see Lendmire’s FHA loan programs page.

About Lendmire

Lendmire — NMLS# 2371349 — is a mortgage broker that arranges FHA, VA, conventional and jumbo home purchase and refinance financing in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. HUD Mortgagee Letter 2019-11

2. HUD Handbook 4000.1 Update transmittal

3. CFPB Office of Research: cash-out refinance borrowers