FHA Cash-Out Refinance vs Conventional Cash-Out After Owning the Home Less Than a Year

The Quick Read: FHA cash-out is generally closed to you until you have owned and lived in the home for 12 months before the case number is assigned. Conventional cash-out has its own seasoning rules, and for a recent buyer the main route is a narrow exception for cash purchases. So in the first year, FHA is mostly a “wait” answer, and conventional is a “maybe, if you fit the exception” answer. Every figure below is subject to lender guidelines and full file review, and none of it is a commitment to lend.

The honest split looks like this. FHA cash-out is for owner-occupiers who have lived in the home a full year, who want to keep a lower credit floor and more flexible ratios, and who can live with mortgage insurance. Conventional cash-out is for people with stronger credit and equity who may be able to act sooner through an exception, or who want to avoid FHA mortgage insurance. Neither one is a shortcut around the clock.

Side-by-Side

A few notes on the table. The FHA 80% figure applies to cash-out. The 96.5% maximum financing and 3.5% minimum investment you may have seen belong to FHA purchase loans, not cash-out. And FHA ratios start at a 31/43 base pair, with documented compensating factors reaching 40/50 at the top tier.

Why the First Year Matters

Think of three separate clocks, because the sources blur them together.

• Ownership clock: how long your name has been on title.
• Occupancy clock: how long the home has been your principal residence.
• Payment clock: how long you have been paying the existing mortgage on time.

FHA cares about the first two together. Per HUD’s consolidated policy source, Handbook 4000.1, cash-out refinance is for owner-occupied principal residences. The FHA cash-out reaches 80% LTV on a home owned and occupied for 12 months before the case number. Confirm the current wording in the handbook itself before relying on that count, because the pages that quote it online are secondary and some are old.

Lenders check occupancy with paper: employment records or utility bills tied to the property address. Starting in month eleven with no address trail leaves little to show, so begin gathering those records early.

One narrow carve-out exists. An heir who inherits a home and never treats it as an investment property may not need the full occupancy period. Rent it out, and the 12 months apply. Confirm the current handbook text on that.

When FHA Cash-Out Is the Better Fit

FHA is the better fit when you will pass the 12-month mark soon and your profile is not conventional-strong. Across the wholesale programs Lendmire places files with, FHA decisions start at a 580 decision score, and the ratio structure gives room that conventional files sometimes lack. A borrower with a thinner credit profile or heavier debts, who has still paid on time and lived in the home for a year, is the typical FHA cash-out candidate.

The tradeoffs are real:

• Leverage is capped at 80%. That means roughly 20% equity stays in the home. HUD Mortgagee Letter 2019-11 cut the cap from 85% to 80% of adjusted value for case numbers assigned on or after September 1, 2019. HUD’s news release tied the change to risk for the FHA insurance fund from growing cash-out balances. That letter is now superseded by the handbook, so the rule lives there. Some older web pages still say 85%. They are stale.
• Mortgage insurance applies. FHA charges an upfront premium of 1.75% of the base loan, which can be 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 above 90% LTV, the annual premium lasts for the term. At or below 90% LTV, it ends after eleven years. With an 80% cap, cash-out loans sit below that line, but term and amount still drive the annual figure.
• Principal residence only. A second home or rental does not qualify for FHA cash-out.
• County loan limits apply. They change every year, so check the current limit for your county.

Credit events matter too. HUD’s own waiting periods run two years from a chapter 7 discharge and three years from a foreclosure. Those are HUD rules, not a promise from any lender.

When Conventional Cash-Out Is the Better Fit

Conventional is the better fit when your credit and equity are strong and you either want to skip FHA mortgage insurance or fit an exception that lets you act inside the first year. At its leverage cap, conventional cash-out generally does not carry private mortgage insurance, which can matter over a long hold.

Here is the catch for recent buyers. The Fannie Mae Selling Guide topic on cash-out refinance transactions sets the rules, and an archived version of that guide lists a property bought within six months of the new loan’s disbursement date as ineligible. The exception is when delayed financing requirements are met. Treat that archived wording as a pointer, and check it against the current guide.

The delayed financing exception is built for cash buyers. You bought the home with cash and now want to pull money back out. It requires documentation of the purchase, the borrower must still meet general eligibility, and the loan is priced as cash-out. It is not a skip-underwriting door, and it is not a rate-and-term loan in disguise. There is no FHA counterpart to it in the sources reviewed.

If you financed the purchase, delayed financing does not apply, and other seasoning tests can come into play. Ask your loan officer to check those tests against the lender’s current guidelines before you plan around any date.

Lender overlays can add requirements beyond agency rules, so the same borrower can get different answers from different programs. Credit, debt-to-income, reserves and appraised value decide the outcome either way.

What You Can Realistically Do in Months 0 to 12

Run the first year in three stretches.

1. Months 0 to 6. FHA cash-out is not available. Conventional is generally closed in this stretch as well, because the archived Fannie Mae wording treats a property bought within six months of disbursement as ineligible. The one exception is a cash buyer who meets the delayed financing requirements. Focus on paying on time and keeping the paper trail: settlement statement, utility bills, pay records at the address.

2. Months 6 to 12. Conventional timing may open, depending on the title and existing-loan tests that apply to your file. FHA still waits for the 12-month mark. This is the stretch where a broker comparison pays off, because the eligible option may not be the best one.

3. Month 12 and later. FHA cash-out becomes possible for a principal residence, if the payment history and other file items line up. Conventional is open on its usual terms.

If you simply need cash before month 12, a cash-out refinance may be the wrong tool. Other products, such as a home equity loan or a line of credit, have their own rules. Neither is a cash-out refinance, so ask about them separately.

A related point: if your current loan is an FHA loan and you only want to lower the cost of it, the FHA Streamline is a different product. It refinances an existing FHA loan with no appraisal and a limited credit review, but it requires a net tangible benefit and gives essentially no cash back. The FHA rate-and-term with an appraisal is another separate option, reaching 97.75% on a principal residence occupied for the previous twelve months.

What Cash-Out Costs You

Both paths replace your existing mortgage with a larger one. The CFPB’s HELOC brochure describes cash-out refinancing that way and says closing costs are generally higher, while you keep making one mortgage payment. CFPB research on cash-out refinances notes that closing costs can be substantial and can include origination, appraisal and title fees.

Rolling costs into the loan lowers your cash at closing but adds interest over time, as the CFPB’s Closing Disclosure explainer lays out. Read the “Cash to Close” line on your Closing Disclosure carefully. The cash you receive depends on the appraised value and the leverage cap, not on what you paid for the home.

Documents to Gather Now

Starting early costs nothing and prevents gaps later.

• Settlement statement from your purchase
• Utility bills or employment records showing the property address
• Twelve months of on-time housing payments
• Recent pay records, bank statements and ID
• Entity or title documents if anything changed after purchase

For a delayed financing file, add proof that the purchase was all cash and where those funds came from.

The Balanced Verdict

If you are inside the first year, the eligibility clock decides more than the product comparison does. FHA is the better fit for a borrower with a modest credit profile who will reach 12 months of ownership and occupancy and can live with 80% leverage and mortgage insurance. Conventional is the better fit for a stronger borrower, or a cash buyer who qualifies for the delayed financing exception. Some borrowers should simply wait. A complete review of property type, leverage, and credit settles where you land.

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. Lendmire’s piece Cash-Out Refinance Requirements When You Have Owned the Home for Less Than a Year covers the seasoning rules across programs.

Key Terms Defined

Seasoning: the time you have owned, lived in, or paid on a home or loan before a new loan is allowed.

Adjusted value: the value FHA uses to test its 80% cap, based on the appraisal.

Delayed financing exception: a conventional route that lets a cash buyer take cash out soon after purchase, with documentation and cash-out pricing.

Case number: the FHA identifier assigned to a file, which marks the date the 12-month count is measured back from.

Net tangible benefit: a required gain, such as a lower payment, in an FHA Streamline.

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

About Lendmire

Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. HUD Handbook 4000.1 information page

2. HUD Mortgagee Letter 2019-11

3. HUD news release 19-114

4. Fannie Mae Selling Guide B2-1.3-03

5. HELOC brochure

6. CFPB cash-out refinance paydown paper

7. CFPB Closing Disclosure explainer