FHA Cash-Out vs Conventional Cash-Out for a Recent Buyer

The Quick Read: It depends on how you bought and how long you have lived in the home, because both programs make a recent buyer wait. FHA looks at 12 months of ownership and occupancy before the case number. Conventional looks at whether your existing first mortgage is at least 12 months old. Both cap cash-out at roughly 80% of value, so the real differences are credit flexibility, mortgage insurance and who qualifies.

The short answer is that conventional tends to fit the borrower with stronger credit and steady income who wants to avoid FHA’s premium structure. FHA tends to fit the borrower whose credit or ratios need more flexibility. Neither one is a shortcut for someone who closed on the home recently. If you bought with little down, the 80% cap may leave you little or no cash above your payoff anyway. Everything below is subject to lender guidelines and full file review, and none of it is a commitment to lend.

Side-by-Side

The conventional leverage figure comes from the agency’s eligibility matrix, which varies by occupancy and unit count. Confirm it against the current matrix before relying on it.

The Two Clocks, and Why a Recent Buyer Hits Both

Seasoning is the lender’s word for how long you have held the loan or the property. FHA and conventional count it differently, and that difference decides most recent-buyer cases.

On the FHA side, across the wholesale programs Lendmire works with, FHA cash-out is available on a home you have owned and occupied for 12 months before the case number. The lender also reviews the payment record on the loan being refinanced. Because FHA standard cash-out is for principal residences only, a home you have not yet moved into, or have rented out, does not start the clock. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.

On the conventional side, the Fannie Mae Selling Guide says that when an existing first mortgage is paid off, it must be at least 12 months old, measured from the existing note date to the new note date. Many websites flatten this into “six months.” The guide also carries a separate title-time rule with exceptions, so loan age and time on title are two different tests. Confirm the current wording with your lender.

Two practical points follow. First, a recent rate-and-term refinance can restart the conventional loan-age clock, because the loan you are paying off must itself be old enough. Second, counting from your application date instead of the note or case number date is a common mistake. It makes people think they are eligible a few weeks before they are.

How the Leverage Cap Plays Out for a Recent Buyer

FHA once allowed more. HUD Mortgagee Letter 2019-11 lowered the maximum LTV and combined LTV on FHA cash-out refinances from 85% to 80% of Adjusted Value, and HUD’s announcement said the change aligned FHA with the maximum cash-out leverage the GSEs allow. So “FHA lets you borrow more” is out of date for cash-out. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.

Now picture a buyer who put 3.5% down on an FHA purchase, which the program allows at up to 96.5% financing. After 12 months, the balance has barely moved. An 80% cap leaves little or nothing above the payoff, and closing costs come out of whatever is left. Appreciation is what creates room. Without it, the cash-out may not pencil at all, and a rate-and-term refinance or simply waiting may be the better path.

Also note that FHA applies its cap to Adjusted Value, not necessarily the raw appraisal, and county loan limits apply to any FHA loan regardless of equity. Conventional loans are subject to conforming limits. On a one-unit primary home, at least 20% equity has to remain after closing on either path. Conventional second-home and investment caps are lower, so those properties require more equity.

When FHA Cash-Out Is the Better Fit

FHA tends to be the stronger lane in these situations:

• Credit is the constraint. The wholesale programs Lendmire places FHA loans with start at a 580 decision score. Some conventional lenders set a higher floor. HUD’s own waiting periods apply after credit events: two years from a chapter 7 discharge and three years from a foreclosure. These are HUD rules, not a promise from the network.
• Debt ratios are the constraint. The FHA base pair is 31/43 (housing to total debt) when a file has no compensating factors. Documented compensating factors can raise that to 40/50 at the top tier, and the automated finding governs most files.
• You already have an FHA loan and have lived in the home through the full lookback with a clean payment record.
• Your equity is solid but your file is imperfect. A borrower with real appreciation and a bruised credit history may find FHA is the only cash-out lane that works.

The tradeoff is the premium structure. FHA charges an upfront premium of 1.75% of the base loan, usually financed, plus an annual premium between 0.15% and 0.75% of the balance depending on term, loan amount and LTV. On a thirty-year loan with high leverage, the annual premium lasts for the term. With lower leverage, it ends after eleven years. On a cash-out capped at 80%, the eleven-year version is the one that typically applies, but that still means years of premium that a conventional loan at the same leverage would not carry.

The flip point: if your credit and ratios would clear conventional comfortably, FHA’s premium structure is a cost you may not need to pay.

When Conventional Cash-Out Is the Better Fit

Conventional is often the cleaner choice when:

• Credit and income are strong. At or below 80% LTV, private mortgage insurance usually does not apply, so there is no ongoing premium stack.
• You want flexibility on occupancy. Conventional cash-out can reach second homes and rentals, at lower leverage caps, while FHA standard cash-out is principal residence only.
• You bought with cash. The Selling Guide describes delayed financing for cash buyers: the new loan is limited to the documented amount invested plus financed closing costs and points. It is still a cash-out refinance, and cash-out pricing applies. Whether FHA has a comparable cash-buyer path is something to verify with the lender against the handbook.
• You qualify for an exception. The guide treats inheritance, legal awards and a buyout under a legal agreement as exceptions to its ownership timing. FHA reportedly waives the occupancy test for an inherited home unless it is rented out, but verify that against the current FHA handbook with your lender.

The tradeoff is rigidity. Conventional underwriting tends to be less forgiving of late payments, higher ratios and thinner credit, and a recent refinance can reset the loan-age clock.

What a Lender Reviews at the Seasoning Check

Expect these items regardless of program:

1. Note date or case number date, to count the clock.

2. Payment history on the loan being refinanced.

3. Occupancy history, since rentals before move-in can break the FHA test.

4. Appraised value against the leverage cap.

5. Credit, income and debt ratios under standard underwriting. A non-occupant co-borrower’s income reportedly cannot be used on FHA cash-out, so confirm that if you were counting on it.

6. Whether the home is listed for sale. A listed property is generally not eligible.

Meeting the wait does not guarantee approval or a cash amount. An 80% allowance is a ceiling, not an entitlement.

Key Terms Defined

Seasoning: The length of time you have held a loan or a property before a lender will allow a certain refinance.

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

Adjusted Value: The value FHA applies its leverage cap to, which is not always the same as the raw appraisal.

Delayed financing: A conventional exception that lets a cash buyer borrow against a recent purchase, limited to the documented investment plus costs.

Combined LTV: The total of all loans on the home divided by its value, including any second lien that stays in place.

If You Are Not Eligible Yet

You have options. A limited cash-out or rate-and-term refinance may fit if your goal is a different term rather than cash. An FHA Streamline can refinance an existing FHA loan with no appraisal and a limited credit review, though it requires a net tangible benefit and the premium continues. A home equity loan or line adds a second lien instead of replacing your first mortgage, which is a different structure with different tradeoffs.

Waiting is also a legitimate answer. Use the time to keep payments current, document occupancy, and let appreciation and principal paydown build equity.

What Do People Do With the Cash?

The CFPB found that cash-out borrowers often use the money to pay down other debt, particularly credit card and auto loan balances. Their credit scores improved sharply at first, then gradually worsened, and credit card balances trended back toward pre-refinance levels over the following year. Cash-out converts unsecured debt into debt secured by your home, so it only helps if the spending habit that built the balances changes.

The Balanced Verdict

For a recent buyer, the first question is not FHA or conventional. It is whether you have cleared the clock at all, and whether 80% of today’s value leaves meaningful cash above your payoff.

If your credit is strong and your ratios are modest, conventional usually carries less long-term insurance baggage. If credit is thin, ratios are tight, or you already hold an FHA loan with a clean record, FHA may be the only practical cash-out lane. A borrower sitting on the line, say a mid-600s credit profile with moderate ratios, might reasonably price both and compare the full cost over the time they expect to keep the loan.

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. 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 brokerage serving homeowners and home buyers in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending channels; Lendmire brokers the financing and the lender underwrites each application. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. Fannie Mae Selling Guide B2-1.3-03, Cash-Out Refinance Transactions

2. HUD Mortgagee Letter 2019-11

3. HUD press release on FHA cash-out loan-to-value

4. CFPB