FHA Cash-Out Refinance vs Conventional Cash-Out Without Selling the House

The Quick Read: Choose FHA if your credit is thinner but your equity is solid, and choose conventional if your credit is strong and you keep enough equity to stay clear of mortgage insurance. FHA fits borrowers who can live with a lower leverage ceiling plus FHA mortgage insurance. Conventional fits borrowers with the cushion to keep mortgage insurance off the new loan. Both let you pull equity out and keep the home, and both are subject to lender guidelines and full file review.

FHA is the more forgiving door on credit and ratios. Conventional is usually the cleaner long-term structure when the borrower is strong. The deciding factors are your credit profile, how much equity is left after the payoff, and how long you plan to keep the new loan.

What a Cash-Out Refinance Does

A cash-out refinance replaces your current mortgage with a larger one and hands you the difference. The new loan pays off the old one first. It then covers closing costs and prepaids, and what’s left comes to you. The federal consumer-finance regulator describes it the same way and notes that, depending on terms, it may cost more or less than a home equity line of credit.

You keep the house. You also take on a bigger balance secured by it. That tradeoff is the whole decision, so it’s worth stating plainly before comparing programs.

Side-by-Side

Two notes on that table. The FHA figures come from the wholesale programs Lendmire places files with, and county loan limits apply on top of them. The conventional column is deliberately general, because conventional guidelines shift by lender and by file.

How FHA Cash-Out Works

The ceiling is a cap on the new loan relative to adjusted value. HUD set that cap in Mortgagee Letter 2019-11, lowering it from the prior limit. The letter’s requirements have since been folded into HUD’s current FHA guidance, which is the live rule. HUD said at the time that cash-out loans were a large and growing share of FHA refinances, and the change was meant to protect the insurance fund while still letting homeowners convert equity through a government-backed mortgage, per HUD’s announcement.

Credit score doesn’t raise that cap. A stronger score doesn’t unlock more leverage on FHA cash-out. It just makes the file easier to approve.

Across the wholesale programs Lendmire places FHA files with, the credit floor starts at a 580 decision score. HUD itself has a lower tier, but the network doesn’t reach below 580. Ratios start at 31/43 with no compensating factors. Documented factors can stretch them to 40/50 at the top tier, and the automated finding governs most files.

The occupancy clock is the piece that trips people up. The home has to be owned and occupied for 12 months before the FHA case number is assigned. The clock runs to case number, not to closing. A borrower who counts to the closing date can come up short.

Mortgage insurance is the cost that defines FHA. There’s an upfront premium of 1.75% of the base loan, which is financed into the balance. There’s also an annual premium between 0.15% and 0.75% of the balance, depending on term, loan amount, and LTV. Because FHA cash-out is capped at 80% LTV, the loan sits at or below ninety percent, where the annual premium ends after eleven years. A cash-out loan is a new endorsement, so the premium structure starts fresh on the new loan. These are program facts, not advertised prices. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.

How Conventional Cash-Out Works

The Fannie Mae Selling Guide sets the framework for a full conventional cash-out. The existing first mortgage being paid off must be at least 12 months old, measured note date to note date. Allowed uses of the new loan include paying off the first mortgage and financing closing costs, points, and prepaids. For automated-underwriting files with a DTI above 45%, six months of reserves is required.

A separate title-seasoning test also applies, so the loan-age clock isn’t the only one. Ask early which clocks your file has to clear.

Conventional has a lighter cousin: limited cash-out, the “no real cash” refinance. It allows only a small amount of cash back. Take more than that, or pay off a second lien that wasn’t used to buy or build the home, and the file converts to full cash-out with tighter leverage. If you want real cash, plan on full cash-out rules.

There’s also delayed financing for recent cash purchases. It stays a cash-out loan, with cash-out limits and pricing.

Conventional mortgage insurance works differently than FHA’s. Where the new loan leaves enough equity, it may not apply at all, and where it does, it can end under different rules than FHA’s annual premium. That difference matters most to borrowers with strong credit and deep equity.

When FHA Is the Better Fit

FHA is the better fit when credit or ratios are the obstacle, not leverage. Picture a homeowner with a 600-range score, a few late payments in the past, and a debt-to-income ratio that sits above the usual conventional comfort zone. A conventional file may stall on the score or the ratios. The FHA file, with documented compensating factors, may still be reviewable up to 40/50.

FHA also fits when the borrower has well over 20% equity and wants a moderate amount of cash, not the maximum. The 80% cap isn’t a problem if you aren’t trying to borrow near it.

Two other cases favor FHA:

• A homeowner recovering from a credit event. HUD’s waiting periods apply: two years from a chapter 7 discharge, three years from a foreclosure. Those are HUD rules, not a promise from the network.
• A homeowner who already understands the insurance premium and plans to refinance again later, which is a legitimate path if the credit improves.

The catch is the premium. It adds cost to a larger balance, and on higher-leverage loans it can last for the whole term.

When Conventional Is the Better Fit

Conventional is the better fit when credit is strong and equity is deep. A borrower with a high score and substantial equity can often keep mortgage insurance off the new loan or have it end sooner. Over a long holding period, that gap can matter more than any small difference in qualifying flexibility.

Occupancy also changes the rules, so confirm how you use the home before comparing the two programs.

Reserves are the friction point. A file with a DTI above 45% can trigger a reserves requirement, and a borrower who’s cash-poor after paying off debts can hit that wall late in the process. Reserves documentation belongs in the first conversation, not the last.

Conventional also asks more of the loan history. The 12-month loan-age test means a recent refinance can leave you waiting. Check the note date on your current mortgage before assuming you’re eligible.

The Leaving-FHA Move

A common path: a borrower with an existing FHA loan whose credit has recovered. They can refinance into a conventional cash-out, pull equity, and shed the FHA premium in one step. That works when the new loan’s leverage is within conventional limits and the credit now supports it.

It doesn’t work when equity is thin. The cash-out leverage ceiling applies after the payoff, closing costs, and the cash you want are stacked together. That stack matters as much as the score, so check it before you count on this move.

Streamline vs. Cash-Out

The FHA Streamline refinances an existing FHA loan with no appraisal and a limited credit review, and it requires a net tangible benefit. It doesn’t pay out real cash. If your goal is equity in hand, the Streamline isn’t the tool. The FHA rate-and-term refinance with an appraisal reaches 97.75% on a principal residence occupied for the previous twelve months, but that’s for restructuring the loan, not extracting cash. Cash-out sits at a much lower ceiling of 80%.

Alternatives Worth Weighing

If your current first mortgage is one you’d rather keep, a second lien such as a home equity loan or a HELOC leaves it untouched. The CFPB notes you may need your HELOC lender’s approval to refinance the first mortgage, and you may have to pay off the HELOC, per its guidance on HELOCs and refinancing. A cash-out refinance isn’t automatically cheaper than a HELOC. It depends on the terms.

The tradeoff is simple. A cash-out refinance resets your whole first mortgage, which matters if your existing loan has terms worth keeping. A second lien leaves it alone.

Risks to Take Seriously

The home secures the larger loan. Miss payments and foreclosure is on the table. The CFPB’s guide to using home equity notes that a cash-out refinance may extend the time to pay off the mortgage and that the payment may rise because the new loan is larger. It also says lenders typically want you to keep at least 10% to 20% of home value as equity. FHA’s 80% cap sits at the stricter end of that range.

Using the cash to pay off credit cards swaps unsecured debt for debt tied to your house. That can make sense. It can also be a trap if the cards fill back up.

Closing costs on a cash-out refinance are generally higher than on a line of credit. Costs are rolled into the balance or paid up front, and either way they reduce the cash you actually net. Ask your loan officer for the Loan Estimate and compare the net cash line, not the headline amount.

Key Terms Defined

Cash-out refinance: A new, larger mortgage that pays off the old one and gives you the difference as cash.

LTV (loan-to-value): The new loan balance divided by the home’s appraised value.

Seasoning: The minimum time a loan, or your ownership, must have existed before you can refinance.

Mortgage insurance premium: The insurance cost built into an FHA loan, charged upfront and annually.

Reserves: Liquid assets you must still hold after closing.

Decision score: The credit score a lender’s guidelines use to evaluate the file.

Verdict

FHA is the practical choice when credit or ratios are the obstacle and the borrower can live with the 80% ceiling and the insurance premium. Conventional is usually the better long-term structure when credit is strong and equity is deep. A borrower sitting between the two should price both on actual Loan Estimates, not guesses.

If you’re weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches. Reach the team at 828-256-2183.

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

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. CFPB: loans similar to a HELOC

2. HUD Mortgagee Letter 2019-11

3. HUD Archives press release 19-114

4. Fannie Mae Selling Guide B2-1.3-03

5. CFPB Ask CFPB: HELOC and refinancing

6. CFPB Using Home Equity guide