FHA Cash-Out Refinance vs Conventional Cash-Out for a Down Payment on Another Property

The Quick Read: It depends on your credit and how much equity you want to keep. FHA tends to suit borrowers with thinner credit who can live with a lower equity ceiling and a mortgage insurance premium that stays on the loan. Conventional tends to suit borrowers with stronger credit who want to avoid ongoing FHA premiums. Either way, the cash comes from the home you live in, and the next purchase is underwritten on its own terms.

The Honest Answer, Before the Details

Both options do the same job. Each replaces your current first mortgage with a larger one and hands you the difference in cash. Neither is a second loan sitting behind the first.

FHA is really for the homeowner whose credit is modest, whose debt ratios run a bit high, or who wants flexible underwriting. Conventional is really for the homeowner with solid credit and plenty of equity who wants a more affordable long-run structure and no permanent premium. Across the wholesale programs Lendmire places files with, the FHA path has more room on credit and ratios. The conventional path has more room on cost over time for a strong file.

One more thing to settle early. The cash is yours to use as you choose. But a second purchase has its own rules for down payment, occupancy and reserves, so check those before you commit to a plan.

Side-by-Side

Some cells say “varies” on purpose. Conventional limits live in the Fannie Mae Eligibility Matrix and in individual lender overlays. Check them against the lender’s current sheet before you plan around them. All figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.

How a Cash-Out Refinance Actually Works Here

Think of it as a swap. The new loan pays off the old one, covers costs, and sends the rest to you. The Consumer Financial Protection Bureau notes this can stretch your payoff time and raise your monthly payment, because a larger loan replaces the current one.

That matters more than usual in this plan. You would carry the bigger payment on your home and a new payment on the next property. Two housing obligations at once is the real stress test.

Lendmire is a mortgage broker, so it arranges these loans through wholesale lenders rather than lending itself.

When FHA Cash-Out Is the Better Fit

FHA wins when qualifying is the obstacle, not cost. It fits you if any of these sound familiar:

• Your credit score sits in the lower or middle range, and you are at or above the 580 decision score our network starts at.
• Your debt ratios are tight. FHA’s base pair is 31/43, and documented compensating factors can stretch to 40/50 at the top tier.
• You have lived in the home and owned it for at least 12 months, which the FHA cash-out requires before the case number.
• You can accept leaving at least 20% equity in the house.

On that last point, HUD cut the cash-out cap to 80% of value in Mortgagee Letter 2019-11. The change was meant to strengthen the equity position behind these loans and reduce losses if a loan defaults. The same letter applies the cap to “Adjusted Value,” not simply whatever the appraisal says. A lower appraisal shrinks your cash.

The tradeoff is mortgage insurance. 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. The annual figure depends on term, loan amount and LTV. At 80% LTV, which is at or below ninety percent, the annual premium ends after eleven years rather than lasting the full term. These are program facts, not prices, and your Loan Estimate shows what applies to you.

Our network does not reach below a 580 decision score. HUD’s lower 500-579 tier is a HUD rule, not something we place.

When Conventional Cash-Out Is the Better Fit

Conventional wins when your file is strong. If your credit is good, your ratios are comfortable, and you want to avoid a premium that rides along on the loan, it usually deserves the first look.

Conventional cash-out is governed by Fannie Mae’s Selling Guide. Leverage and credit limits sit in the Eligibility Matrix rather than the guide text. The guide also applies a loan-level price adjustment to certain cash-out refinances based on LTV and credit score. That is pricing that rises as credit weakens or leverage climbs. So conventional cash-out gets pricier exactly where FHA gets more forgiving.

One more difference: reserves. The matrix indicates minimum reserves can apply to automated cash-out files when the debt-to-income ratio is above 45%. If your ratios are stretched, conventional can ask for more cash in the bank.

Also watch the seasoning clocks. Conventional looks at time on title and the age of the loan being paid off. Confirm both with the lender, because these tests can affect eligibility regardless of your credit.

The Part Most Comparisons Skip: The Next Purchase

Here is the practitioner’s view. The refinance is the easy half. The second purchase is where files get tested.

Occupancy of the new property. The leverage and loan type available for another home depend on how you will use it. FHA purchase loans, for instance, are for an owner-occupied principal residence, one to four units. If the next property is not your new primary home, occupancy changes the available leverage, so confirm the structure before you pull equity.

Your new debt load. The bigger payment on your current home counts in the next lender’s ratios. Run that before you refinance, not after.

How the cash is treated. Next lenders typically want to see where down payment funds came from. Cash from a recent refinance is documented, and some lenders have their own rules on reserves. Confirm how the purchase lender will count it.

Order of operations. Borrowers often ask whether to refinance first or buy first. There is no universal answer. Refinancing first gives you the cash in hand but locks in the new payment before the purchase underwriting. Buying first can strain the ratios on both files. A broker can sketch both sequences against your actual numbers.

What if you move out? Both paths assume you live in the cash-out home. A plan to move out soon after closing is a different conversation. Raise it with your loan officer up front.

A Walk-Through: Two Homeowners, Same Goal

Picture a homeowner with a middling credit score, a high-ish debt load, and a home owned and lived in for more than a year. She wants cash toward a purchase. Conventional pricing steps up with weaker credit, and her ratios push toward the edge of what automated findings tolerate. FHA’s flexibility and ratio room can make the difference between a file that works and one that doesn’t. She pays for it through the annual premium.

Now picture a homeowner with strong credit, modest debts and ample equity. Conventional keeps his cost lower over time and carries no ongoing FHA premium. FHA would work, but he would pay for flexibility he does not need.

Most real borrowers sit between these two. That is why the comparison belongs on your own numbers, not on a rule of thumb.

Alternatives Worth a Look

A cash-out refinance replaces your existing first mortgage. A home equity loan or HELOC leaves it in place and adds a second lien, per the CFPB’s research on cash-out borrowers. If your current loan terms are valuable to you, leaving the first mortgage untouched may matter more than anything else here.

Both cash-out paths also carry a three-business-day cancellation window on a principal residence. Funds are not released until it closes.

Key Terms Defined

LTV (loan-to-value): the loan amount as a percentage of the home’s value.

Adjusted Value: the value HUD uses to apply the FHA cap, which is not always the raw appraisal.

Seasoning: the waiting period that must pass before a loan or ownership counts toward eligibility.

Loan-level price adjustment: an extra pricing charge that applies to certain conventional loans based on credit score and LTV.

Mortgage insurance premium: FHA’s upfront and annual charges that protect the lender against default.

Compensating factors: documented strengths, like savings, that let a lender accept higher debt ratios.

A Balanced Verdict

Choose FHA cash-out if your credit or ratios make conventional hard, you have owned and lived in the home for 12 months, and you can live with 80% leverage and the premiums. Choose conventional if your file is strong and you would rather avoid a premium attached to the loan. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.

If you are on the fence, the cheaper-looking option on paper often changes once the real credit score and the real ratios go in. And the bigger risk is rarely the refinance itself. It is carrying two housing payments with thinner cushions than you planned.

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. Consumer lending is available in 16 states, and program details are subject to lender guidelines and full file review.

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. Fannie Mae Eligibility Matrix

2. CFPB: Using Home Equity Guide

3. HUD Mortgagee Letter 2019-11

4. Fannie Mae Selling Guide: Cash-Out Refinance Transactions

5. CFPB’s research on cash-out borrowers

6. CFPB: Right of Rescission