FHA Cash-Out Refinance vs Conventional Cash-Out With Student Loans in Deferment

The Quick Read: Deferment does not hide your student loans from either program. Both make the lender count a stand-in monthly payment for the deferred balance. FHA counts a smaller stand-in than conventional, so FHA often suits borrowers whose debt-to-income ratio is tight or whose credit is bruised. Conventional often suits borrowers with solid credit and a clean ratio, particularly if avoiding FHA’s mortgage insurance matters to them.

Here is the honest version. Neither option is the “better” loan. They are built differently, and the same deferred balance can produce a different debt-to-income number under each one. That gap is the whole comparison.

A quick definition first. Debt-to-income (DTI) is your monthly debts divided by your monthly gross income. Lenders check it twice: once for housing costs alone, once for all debts together. A deferred student loan has no payment today. The lender still assigns it a placeholder payment so the ratio reflects the day payments resume.

Side-by-Side

Conventional figures here are general guidelines and vary by lender. FHA figures reflect the wholesale programs Lendmire places files with, subject to lender guidelines and full file review.

How Each Program Counts a Deferred Loan

This is where the two diverge. Under HUD Mortgagee Letter 2021-13, an FHA lender must include every student loan in your liabilities, whatever its status. If your credit report or your paperwork shows a payment above $0, the lender starts from that. If the reported payment is $0, as in deferment or forbearance, the lender uses 0.5% of the outstanding balance.

Conventional works differently. Fannie Mae’s Selling Guide, section B3-6-05 says deferred debts must be counted in your monthly obligations. For loans in deferment or forbearance, the lender may use a payment equal to 1% of the balance. Whether a documented payment can replace that figure depends on the lender and the specific loan plan.

Same loan, two stand-in payments. One is half the size of the other.

Think of a borrower with a large deferred balance and an otherwise fine file. Under FHA, the placeholder takes a smaller bite out of the ratio. Under conventional, it takes twice that bite. That difference alone can decide whether the file clears the ratio limits.

Two wrinkles matter here:

• Interest keeps growing. Per Federal Student Aid, interest accrues on unsubsidized loans during deferment and on all loans during forbearance, and unpaid interest can be capitalized. The balance at underwriting may be higher than what you originally borrowed, which raises the placeholder.
• Paid-off debt drops out. If cash from the refinance pays a student loan at closing, that loan’s placeholder no longer counts in the ratio. Whether that works depends on the lender’s rules for paying off debt at closing and on how much cash is left after the payoff.

When FHA Cash-Out Is the Better Fit

FHA can be the stronger fit in three situations. First, your DTI is the problem. The smaller placeholder gives you more room, and FHA’s ratio structure is flexible. Across the wholesale programs placed through Lendmire’s FHA cash-out refinance program page, the base ratios are 31/43 (housing and total debt) with no compensating factors. Documented compensating factors can stretch them to 40/50 at the top tier, though the automated finding governs most files.

Second, your credit is middling. A 580 decision score is the starting point in the programs Lendmire places FHA loans with. Some conventional lenders set a higher floor.

Third, you value the structure over the lowest possible insurance cost. FHA carries an upfront premium of 1.75% of the base loan, which is financed, plus an annual premium between 0.15% and 0.75% of the balance. The annual premium depends on term, loan amount and LTV. On a thirty-year loan above 90% LTV it lasts for the term. At or below 90% it ends after eleven years. Cash-out at 80% lands in the second group. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.

The tradeoffs are real:

• You must have owned and lived in the home as your principal residence for 12 months before the case number is assigned.
• The 80% cap applies to the whole new loan, not the cash you receive.
• County loan limits apply, and they change every year.
• The premiums add cost to the loan.

A common misunderstanding: FHA does not let you pull out more than conventional. HUD cut the FHA cash-out limit from 85% to 80% to align it with the GSE maximum. On a primary residence, both programs sit at the same ceiling.

When Conventional Cash-Out Is the Better Fit

Conventional also wins when your goals fall outside FHA’s lane. FHA standard cash-out is for principal residences only. Conventional has separate, lower caps for second homes and multi-unit properties, so a borrower with a different occupancy picture may have no FHA option at all. Occupancy decides the leverage, so say plainly how you use the property.

Conventional can also be the better choice when you plan to pay off the deferred loans at closing. For some borrowers this erases the conventional program’s biggest disadvantage, the larger 1% placeholder.

The tradeoffs:

• The 1% placeholder is harsher on a large deferred balance.
• Credit floors and pricing vary by lender, so shop the terms, not just the program name.
• Rules differ by lender on documented payments, so ask early.

(Your mileage will vary by lender more on the conventional side than on FHA, where HUD’s rule is uniform.)

Should the Cash Pay Off the Student Loans?

Sometimes yes, often no. It depends on what kind of student loan you hold.

A cash-out refinance can retire a student loan and clear its placeholder from your ratio. For a private loan, that may be reasonable. For a federal loan, think harder. Paying it off with mortgage money gives up federal repayment protections, such as income-driven plans and deferment options. You can’t get those back. Visit studentaid.gov before deciding.

There is a second cost. Moving unsecured debt onto your home makes it secured debt. The CFPB warns that cash-out refinances can turn debt like credit cards into home-secured debt and can raise foreclosure risk. The same logic applies to student loans.

Also remember what 80% means. It caps the whole new loan, which includes your payoff, closing costs and any financed items. Cash back is what’s left.

Mistakes That Trip Up Deferred-Loan Borrowers

• Assuming deferred means invisible. Both programs count it.
• Ignoring accruing interest. Your balance may be larger than you think.
• Reading 80% as cash received. It is a cap on the total loan.
• Skipping the paperwork. Underwriters want servicer statements showing balance, status and terms. A lender may also want written documentation if the payment you want counted is lower than the credit report shows.
• Treating an income-driven $0 payment as settled. Whether a documented $0 counts can differ by program and lender. Ask before you apply.
• Confusing cash-out with rate-and-term. FHA rate-and-term reaches 97.75% on a principal residence occupied for the previous twelve months. If you only want to change the loan terms and not take cash, that is a different product with different tests.

State-specific rules, Texas among them, can add requirements to cash-out loans.

A Practitioner’s Read

What sinks a borrower’s plan is the combination: a large balance, a thin ratio and a payoff plan nobody ran against the 80% cap. The borrowers who do best sit down with their servicer statements first, work out the placeholder under each program, and only then pick a lane. The program choice often becomes obvious once the placeholder math is on paper.

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 details 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.

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. HUD Mortgagee Letter 2021-13

2. Fannie Mae Selling Guide B3-6-05

3. Federal Student Aid: Deferment and Forbearance

4. HUD press release 19-114

5. CFPB: CFPB Mortgage Report Finds Jumps in Closing Costs and Denials for Insufficient Income Growing Proportion of Cash Out Refinances