FHA Cash-Out Refinance vs Conventional Cash-Out With an Existing FHA Mortgage

The Quick Read: Either loan can pay off your current FHA mortgage and put cash in your hands. The right choice depends on your credit, your equity, and what mortgage insurance would cost you afterward. FHA tends to suit borrowers with thinner credit files. Conventional tends to suit borrowers with strong credit and plenty of equity, who want to leave FHA insurance behind. Program details are subject to lender guidelines and full file review, and nothing here is a commitment to lend.

Here is the honest answer in a paragraph. An FHA cash-out refinance keeps you in the FHA system. It is built for people whose credit is good enough but not great. Its trade-off is a firm cap on how much you can borrow against the home. A conventional cash-out refinance leaves FHA behind. It usually rewards stronger credit, and it may let you shed FHA mortgage insurance. Its trade-off is stricter credit and file standards. Neither one is cheaper in every case. Each one wins for a different borrower.

Side-by-Side

Mortgage insurance is the line that usually decides this, so read it closely. The table uses only program facts, with no pricing.

Two notes on the table. Leverage figures for conventional loans change with property type and occupancy, so ask a lender for the current matrix. Also, “usually higher” on credit is a pattern, not a rule. Some conventional lenders set a floor close to FHA’s, and others set it well above.

What Each Loan Actually Does

A cash-out refinance replaces your current mortgage with a larger one. The new loan pays off the old balance, and you keep the difference as cash. The CFPB describes it the same way: a bigger loan, with part of it used to pay off the existing mortgage. Home equity loans and HELOCs work differently, because they leave your first mortgage in place.

That matters for you. When you cash out, your old FHA loan ends. Its insurance ends with it. The new loan, FHA or conventional, starts fresh with its own insurance rules.

One misconception comes up constantly. People think they need an existing FHA loan to get an FHA cash-out. They do not. Others think an existing FHA loan blocks a conventional cash-out. It does not either, because a conventional loan can pay off an FHA mortgage.

How FHA Cash-Out Works

Across the wholesale programs Lendmire places files with, the FHA cash-out tops out at 80% loan-to-value. That is the share of your home’s value you can owe once the new loan is in place. It applies to a home you have owned and lived in for 12 months before the FHA case number is assigned.

That 80% cap is not old news. HUD lowered it in Mortgagee Letter 2019-11 for case numbers assigned on or after September 1, 2019. HUD wanted more equity left in the home to reduce losses when a loan defaults. Its own announcement says the cap had earlier been cut from 95% to 85%, then from 85% to 80%. Old figures still float around online. Ignore any article that quotes 85% or 95%.

Two other points. The cap applies to the whole new loan, including any second lien. And HUD measures against “Adjusted Value,” a formula-based value, not just the raw appraisal.

Here is a trap worth naming. The 80% cap does not mean you receive 80% of your home’s value in cash. The cap limits the entire new loan. Your cash is what remains after the old FHA balance, closing costs, and any other liens are paid.

Credit works as follows. The programs we place FHA loans through start at a decision score of 580. HUD’s own rules reach lower, but the wholesale network does not. Ratios compare your housing cost and total debts to your income. The base pair is 31/43 with no compensating factors. Documented compensating factors, such as cash reserves, can reach 40/50 at the top tier.

Mortgage insurance has two parts. There is an upfront premium of 1.75% of the base loan, usually financed into the balance. There is also 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 whole term. At or below 90% LTV, it ends after eleven years. Since FHA cash-out stops at 80%, the lower-LTV schedule may be relevant. Confirm that on your specific file.

How Conventional Cash-Out Works

Conventional loans follow guidelines set by the large mortgage investors, with each lender adding its own overlays. Fannie Mae’s Selling Guide points to an eligibility matrix for maximum LTV and credit score. The limits shift with property type, occupancy, and number of units. A one-unit primary home generally gets the most room. Multi-unit homes and manufactured homes often get less. Check the current matrix before assuming a number.

Fannie Mae also tests two clocks, announced in SEL-2023-01. The mortgage being paid off must be at least 12 months old, counted from note date to note date. And at least one borrower must have been on title for six months before the new loan disburses, with listed exceptions. If you are paying off an existing FHA loan, both clocks apply to you.

Pricing also layers in. Some cash-out loans carry a loan-level price adjustment, which is a fee-like charge built into pricing based on LTV and credit score. Lenders vary on how they present it. Compare Loan Estimates side by side instead of guessing.

One more fact helps the FHA borrower. Your existing FHA loan does not block a conventional cash-out refinance, and a conventional lender does not need to already own that loan to pay it off.

When FHA Cash-Out Is the Better Fit

FHA tends to win in these situations:

• Your credit is mid-range. If your score sits in a band where conventional lenders hesitate or price steeply, FHA’s floor of 580 may be the open door.
• Your ratios are tight but documented. FHA allows compensating factors to stretch ratios up to 40/50 at the top tier. That flexibility is real, though not universal.
• Past credit events are fading. HUD’s waiting periods are two years from a chapter 7 discharge and three years from a foreclosure. These are HUD’s rules, not a promise from any network. Conventional guidelines are often longer.
• You are comfortable with mortgage insurance. If you plan to stay a long time and the insurance cost fits your budget, the trade-off may be acceptable.

Picture a homeowner with a decent but not stellar score, a stable job, and about 25% equity. Her conventional options come back narrow. The FHA cash-out at 80% LTV leaves room for her cash need and works inside her ratios. That is the profile this loan was built for. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.

The honest cost: insurance. You pay the upfront premium, and the annual premium continues under the rules above. You are also capped at 80% of value, so if you need more cash than that allows, FHA cannot stretch.

When Conventional Cash-Out Is the Better Fit

Conventional tends to win in these situations:

• Your credit is strong. Better scores usually earn better terms, and the loan-level adjustments shrink.
• You want out of FHA insurance. This is the big one. The CFPB explains that private mortgage insurance can be cancelled on request when the balance is scheduled to reach 80% of original value, and servicers must end it automatically at 78%. FHA insurance does not follow that rule. The Homeowners Protection Act’s cancellation rights do not apply to it.
• Your leverage stays low. If the final loan lands at 80% or below on a one-unit primary home, the new loan often needs no mortgage insurance at all. Whether it does depends on the final LTV and the lender.
• You have solid equity. More equity gives conventional pricing room to work.

Consider a homeowner who bought with FHA a few years ago. His credit has climbed, his home has gained value, and his FHA premium keeps running. A conventional cash-out lets him take cash and potentially end that insurance in one step. That is the “do both goals at once” play, and it is often the strongest argument for switching.

The cost: stricter file standards. You face credit minimums that vary by lender, possible price adjustments, and the seasoning clocks above. You may also hit tighter caps if the home is a multi-unit or manufactured property.

The Insurance Question That Decides Most Cases

Start with one comparison: the cost of mortgage insurance over the time you expect to keep the loan. Do it this way. Ask each lender for a Loan Estimate on both paths. Look at the monthly mortgage insurance line, any upfront premium, and the total cost over the years you expect to hold the loan. Then ask when the insurance can end.

If you expect to keep the loan a short time, the upfront premium and the early years of monthly insurance carry the most weight. If you expect to keep it a long time, the insurance schedule matters more, and an option that can cancel insurance later gains value.

Here is a genuine toss-up worth thinking through. A borrower with a middling score and a thin cushion above 80% might be better off waiting. Improving credit or paying the balance down could open conventional terms that cost less over time. Another borrower with an urgent need and no time to wait may reasonably take FHA now. Both are defensible. The right answer depends on how much the cash is worth today.

Things to Check Before You Commit

1. The clocks. FHA counts 12 months of ownership and occupancy back from the case number date. Conventional counts title time and the age of the loan being paid off. Appreciation does not shorten either one. A recent purchase usually cannot cash out on either path yet.

2. The cash amount. Subtract your old balance, closing costs, and other liens from the capped loan. That is your real number.

3. The purpose. HUD’s research shows paying off other debts is the most common stated reason for cash-out. The CFPB cautions that moving non-mortgage debt into mortgage debt can raise foreclosure risk. A larger loan can also lengthen your payoff timeline and raise the payment.

4. The cancel window. On a refinance of your home, you generally have until midnight of the third business day to rescind. Saturdays count. Sundays and legal holidays do not. If you rescind, you still owe the original loan.

5. Taxes. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.

The FHA Streamline sounds similar but is a different product. It refinances an existing FHA loan with no appraisal and a limited credit review, but it gives no cash. If cash is your goal, it is not the loan.

Key Terms Defined

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

LTV (loan-to-value): Your loan balance divided by your home’s value, shown as a percentage.

Seasoning: The waiting period a lender or program requires before you can refinance or cash out.

Mortgage insurance: Coverage that protects the lender if you default, paid by you through premiums.

Compensating factors: Strengths in your file, such as reserves, that can offset a weaker area like high ratios.

A Balanced Verdict

Choose FHA cash-out if your credit is in the middle, your ratios are tight, and you can live with its mortgage insurance and the 80% cap. Choose conventional cash-out if your credit is strong, your equity is deep, and ending FHA insurance is part of your goal. If you are close to the line on credit, consider whether waiting a short time and improving your score could change which loan fits.

No option is cheaper in every case. Run both on real Loan Estimates, and let the full cost over your holding period make the call. 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.

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

About Lendmire

Lendmire (NMLS# 2371349) is a mortgage broker licensed for consumer lending in 16 states. Lendmire arranges FHA, VA, conventional and jumbo purchase and refinance loans through wholesale lenders; every file is underwritten by the lender under the applicable program guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. CFPB Older Americans housing guide

2. HUD Mortgagee Letter 2019-11

3. HUD press release on FHA cash-out risk

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

5. Fannie Mae Eligibility Matrix

6. Fannie Mae announcement SEL-2023-01

7. CFPB Ask CFPB: PMI removal

8. CFPB cash-out research (newsroom)