FHA Cash-Out Refinance vs Conventional Cash-Out With a Co-Borrower Who Lives Elsewhere

The Quick Read: It depends on whose income carries the loan. On an FHA cash-out, a relative who lives elsewhere may be able to sign, but that person’s income generally cannot be used to qualify, so the homeowner must qualify alone. Conventional is not one rule: Fannie Mae’s guidelines allow an outside co-borrower’s income to count under conditions, while Freddie Mac’s do not allow that borrower on a primary-residence cash-out at all.

The Honest Answer, Before the Details

FHA cash-out fits the homeowner who has lived in the house for 12 months, can carry the new payment on personal income, and wants a lower credit floor than conventional usually offers. A helper elsewhere is a nice-to-have there, not a qualifying tool.

Conventional fits the homeowner who needs the outside person’s income to make the numbers work. That path only opens if the loan is sold under guidelines that allow it. Neither option is “better.” They answer different questions.

In practice, the co-borrower question often decides the loan type before the equity does.

Key Terms Defined

Occupant borrower: A borrower who lives in the home as a primary residence.

Non-occupant co-borrower: A person on the loan who does not live in the home, such as a parent or an adult child living elsewhere.

Cash-out refinance: A new mortgage that replaces your current first mortgage and gives you cash from your equity.

Adjusted value / appraised value: The home’s value used to apply the leverage cap. A low appraisal shrinks the cash available.

On the note vs. on title: Being on the note means you are legally responsible for the debt. Being on title means you own the property. A person can be one without the other.

Side-by-Side

Two notes on the table. Conventional credit floors differ from lender to lender, so some lenders set a higher floor than others. And FHA’s annual mortgage insurance premium ranges from 0.15% to 0.75% of the balance depending on term, amount and LTV. On a thirty-year loan above 90% LTV it lasts the full term; at or below 90% it ends after eleven years. Everything here is subject to lender guidelines and full file review.

How the FHA Rule Actually Works

FHA cash-out reaches 80% LTV. HUD reduced the cap from 85% to 80% of adjusted value in Mortgagee Letter 2019-11, and HUD’s Handbook 4000.1 transmittal confirms the change was folded into the Handbook. At that cap, at least 20% equity stays in the home. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.

The co-borrower point is where the pages online disagree. Older HUD material was stricter: a 2009 Mortgagee Letter required co-borrowers on a cash-out to be occupants and barred adding a non-occupant to meet credit guidelines. That is historical context. Current Handbook 4000.1 wording, as reproduced in secondary sources, says income from a non-occupant co-borrower may not be used to qualify for a cash-out. Readers should confirm the current text in HUD’s Handbook 4000.1 before relying on either version.

The practical effect is the same either way. If the occupant cannot carry the new payment alone, the outside helper does not fix it on FHA cash-out. This differs from FHA purchases, where a non-occupant co-borrower is allowed and can help. Purchase and cash-out are separate rules.

Ownership and occupancy matter too. FHA cash-out is for a principal residence the borrower has owned and occupied for the 12 months before the case number is assigned. An FHA ratio base of 31/43 applies with no compensating factors, and documented factors can stretch toward 40/50 at the top tier.

How Conventional Splits Into Two Different Answers

“Conventional” means loans sold to one of two agencies, and they diverge here.

Fannie Mae’s Selling Guide states that non-occupant borrowers are permitted on purchase, limited cash-out and cash-out refinance transactions. In Desktop Underwriter, the system considers that borrower’s income, assets, liabilities and credit. For manually underwritten loans using a non-occupant’s income, a down-payment condition applies unless LTV is 80% or less, and it is written around purchases, so how it applies to a refinance is a question for the lender. The agency’s eligibility matrix also sets lower leverage limits when a non-occupant’s income is used, which can shrink the cash you receive.

Freddie Mac goes the other way. Its Guide §5103.1 says that when a mortgage includes a non-occupying borrower, the mortgage must be a purchase or no cash-out refinance. A primary-residence cash-out with an outside co-borrower is not available under that agency’s guidelines.

So the question for a conventional lender is not “do you allow co-borrowers?” It is “which agency will this loan be sold under, and does it use the outside borrower’s income?” Lenders also add their own overlays, which can be tighter than either agency.

When FHA Is the Better Fit

FHA tends to be the stronger choice in these situations:

• The occupant qualifies alone. If your own income carries the payment, the outside co-borrower rule stops mattering.
• Credit is bruised but recovering. Network lenders start at a 580 decision score, and HUD sets its own waiting periods after credit events: two years from a chapter 7 discharge and three from a foreclosure.
• Maximum leverage is not the goal. The FHA cash-out reaches 80% LTV. Conventional leverage varies by agency and by whether outside income is used, so the gap may be small or may favor either side depending on the file.
• The home is inherited. HUD’s guidance, as reproduced in secondary sources, says an heir need not meet the usual minimum occupancy period before a cash-out, provided the property was not treated as an investment property. If it was rented out, the 12 months of occupancy apply.

The tradeoff is cost structure. FHA adds an upfront premium financed into the loan plus annual mortgage insurance. For a borrower with solid credit and 20% equity left behind, conventional often avoids that layer entirely. Run both through a Loan Estimate before choosing.

When Conventional Is the Better Fit

Conventional is usually the better path when:

• The occupant cannot qualify alone and the helper has strong income. Under Fannie Mae guidelines, that outside income may count. It is the only route here that can.
• Credit is strong. Better scores tend to widen the gap in conventional’s favor, particularly since cash-out leaves 20% equity in place.
• Mortgage insurance is the pain point. At 80% LTV or below, conventional generally carries no mortgage insurance, while FHA’s annual premium lasts the full term above 90% LTV on a thirty-year loan and ends after eleven years at or below 90%.
• A co-owner is being bought out. Fannie Mae treats buying out a co-owner under a legal agreement as an exception to its cash-out seasoning rules, though the buyer must qualify on the agency’s underwriting guidelines.

Here’s the catch. A conventional file that depends on an outside borrower’s income has more moving parts, and the lender’s overlays decide whether it works. Ask directly which agency’s guidelines apply before paying for an appraisal.

Consider the toss-up cases: a borrower with middling credit, a helper with great income, and a house worth more than the existing loan. Conventional may be the only door that opens, but it may also come with a lower leverage limit. That trade, less cash for more qualifying power, deserves a hard look before committing.

What the Outside Co-Borrower Takes On

Signing is not a favor without cost. A co-borrower on the note is legally responsible for the whole debt. The loan appears on their credit and counts in their own debt ratios when they apply for something else.

On FHA, there is a fairness problem as well: the helper takes on the liability while contributing nothing to qualifying. Many families conclude that is not worth it and have the occupant borrow alone.

Scenarios Without the Dollar Signs

A parent helping an adult child. The child lives in the home, owns it 12 months and wants cash for repairs. If the child’s income carries the loan, FHA works with or without the parent. If it does not, only a conventional file under Fannie Mae guidelines can use the parent’s income, with the leverage limits noted above.

A co-owner buyout. Two siblings inherited a house, and one buys out the other. The buyer must qualify on their own under the conventional guidelines, and the transaction may be classified differently than a standard cash-out. Confirm the classification up front.

A helper already on the old loan. If the outside person is on the current mortgage, the refinance becomes the chance to remove them, but only if the occupant qualifies alone. That is a clean fit for FHA when the numbers work.

Common Mistakes

• Assuming a co-signer can always fix a debt-to-income problem on a refinance.
• Assuming FHA purchase rules apply to FHA cash-out.
• Treating “conventional” as one rule, when the agencies differ.
• Using the old 85% FHA cash-out figure.
• Assuming being on title is the same as occupying the home.
• Forgetting the appraisal. The cap applies to appraised value, so a low appraisal cuts the cash.

One more point: a cash-out replaces your existing first mortgage. The CFPB notes that, unlike a home equity loan or HELOC, it takes the place of the original loan. If your current terms are ones you value, weigh that. The CFPB’s home equity guide adds that a cash-out may extend your payoff time and raise your monthly payment.

The Balanced Verdict

If the occupant can qualify alone, FHA and conventional become a cost comparison: FHA’s mortgage insurance and flexibility against conventional’s stricter credit expectations. If the occupant cannot, FHA will not use the helper’s income, and conventional is the only path, but only under guidelines that permit it, and only with the lower leverage limits that may attach.

Ask each lender the same three questions: which agency’s guidelines apply, whether the outside borrower’s income counts, and what the maximum leverage is with that income. 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.

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

About Lendmire

Lendmire is a mortgage brokerage (NMLS# 2371349) licensed for consumer mortgage lending in 16 states, arranging FHA, VA, conventional and jumbo purchase and refinance loans through a wholesale lending network. Eligibility is determined by the lender on each file. 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 transmittal (Dec 2019)

3. Mortgagee Letter

4. Fannie Mae Selling Guide B2-2-04

5. Freddie Mac Guide §5103.1

6. CFPB

7. CFPB home equity guide