The Quick Read: FHA cash-out fits owner-occupants who need a more forgiving credit profile and can live with mortgage insurance. Conventional fits borrowers with stronger credit who want to avoid mortgage insurance at the leverage cap, or who are borrowing on a second home. Both treat a home with no mortgage as a cash-out refinance, and the appraisal sets the ceiling on either one. Program details are subject to lender guidelines and full file review.
Why a Home With No Mortgage Still Counts as Cash-Out
A new first lien on a free-and-clear home is a cash-out refinance. There is no old loan to pay off, so the loan amount, less closing costs, comes back to the borrower. The program’s leverage cap and cash-out underwriting apply from the first dollar.
That surprises people. They assume “cash-out” means paying off a balance and keeping the leftover. On a paid-off home, the whole transaction is the leftover.
Two practical points follow. First, the appraisal drives everything. Both programs cap the loan at a percentage of appraised value, so a light appraisal shrinks the draw no matter how strong the credit is. Second, the two products sit differently in the lien structure. The federal consumer-finance regulator notes that home equity loans and HELOCs leave the original first mortgage in place, while a cash-out refinance does not. On a paid-off home, that distinction matters less, since a HELOC or equity loan would simply be your only lien. It matters again when you compare options later in this piece.
Side-by-Side
| Factor | FHA Cash-Out | Conventional Cash-Out |
|---|---|---|
| Maximum leverage | 80% LTV | 80% on one unit; 75% on two to four units |
| Credit floor | More forgiving; lender floors vary | Generally stronger credit expected |
| Mortgage insurance | Upfront 1.75% plus annual premium | Typically none at 80% LTV or below |
| Occupancy | Owner-occupied principal residence only | Principal home, second home or other occupancy |
| Ownership history | 12 months owned and occupied | Title-time rules; delayed financing exception for recent cash purchases |
| Documentation | Occupancy evidence, income, debt ratios | Income, assets, debt ratios |
| Debt ratios | Base 31/43; up to 40/50 with documented factors | Set by automated findings and lender guidelines |
FHA’s 80% cap comes from HUD Mortgagee Letter 2019-11, which cut the older 85% limit to reduce risk to the FHA insurance fund. Some older web pages, including archived HUD material, still show 85%. Treat those as out of date.
The conventional caps come from the Fannie Mae Eligibility Matrix. Second homes and other occupancies carry lower caps than the figures above.
County loan limits apply to FHA and change every year. Check the limit for your county before you plan a draw.
When FHA Cash-Out Is the Better Fit
FHA tends to win when credit is the constraint. Across the wholesale programs Lendmire places FHA files with, the decision-score starting point is lower than most borrowers expect from a cash-out product. Individual lenders may set stricter floors than HUD does, and that varies. The FHA cash-out refinance program reaches 80% LTV on a home you have owned and occupied for 12 months before the case number is assigned.
It also fits when debt ratios run high. The base pair is 31/43 with no compensating factors. Documented compensating factors, such as reserves or a strong payment history, can reach 40/50 at the top tier. The automated finding governs most files, so ratios are a starting point, not a verdict.
The trade-off is mortgage insurance. FHA charges an upfront premium of 1.75% of the base loan, usually financed into the balance. It also charges an annual premium, between 0.15% and 0.75% of the balance depending on term, loan amount and LTV. At 80% LTV, the annual premium ends after eleven years. That is a program fact, not a price quote. Your Loan Estimate shows how it lands on your file.
Picture a retiree who paid off the house years ago, has a thinner credit file after a medical-debt stretch, and wants cash for a roof and a new furnace. FHA can fit that borrower where a conventional file might stall, provided the home is the borrower’s principal residence.
When Conventional Cash-Out Is the Better Fit
Conventional wins when credit is solid and the goal is to keep mortgage insurance off the file. At 80% LTV or below, conventional cash-out typically carries none. Over a long hold, skipping both the upfront and annual premium can matter more than the credit flexibility FHA offers.
It also wins on occupancy. FHA is owner-occupant only. Conventional allows second homes and other occupancies, each with its own lower cap. If the property is a vacation home you own outright, FHA is off the table.
Conventional also has a path for recent cash buyers. Under the Fannie Mae Selling Guide, the delayed financing exception lets a borrower who bought within the past six months take cash out, if the original purchase was an arm’s-length transaction and the other requirements are met.
Two-to-four-unit owner-occupied homes cut both ways. Conventional drops to 75% on those. FHA’s current handbook rules on multi-unit cash-out should be confirmed with your lender before you plan around them.
Key Terms Defined
Cash-out refinance: A new first mortgage that gives you cash, secured by the home.
LTV (loan-to-value): The loan amount divided by the appraised value.
Mortgage insurance: Coverage that protects the lender, paid by the borrower, usually as an upfront charge plus an annual one on FHA.
Delayed financing: A conventional exception that allows cash-out soon after a cash purchase.
Seasoning: The time you must have owned, or held a loan on, the home before cash-out is available.
The Clocks: What Applies With No Existing Loan
Conventional has a loan-age rule. A mortgage being paid off must be at least 12 months old, per the Fannie Mae announcement. A paid-off home has no such loan, so that rule has nothing to measure. What remains is how long you have held title.
FHA looks at ownership and occupancy history instead. Lenders typically want evidence you have lived there, such as utility bills or employment records showing the address. Gaps in that paper trail cause more FHA delays than the credit review does.
Mistakes That Derail These Files
- Planning off an 85% FHA cap. The cap is 80%. The draw you built on the old number won’t hold.
- Assuming a cash purchase unlocks FHA cash-out right away. It doesn’t. That exception is conventional.
- Ignoring the appraisal. A conservative value cuts the draw on both programs.
- Forgetting new liens. Any other lien on the home must be settled at closing.
- Treating the Loan Estimate as an approval. It is a disclosure of terms, not a decision.
Is a Cash-Out Even the Right Tool?
Sometimes it isn’t. A home with no mortgage has no payment against it. A cash-out creates one, secured by the house. The CFPB warns that converting other debts into mortgage debt can put the home at risk of foreclosure if payments become unsustainable, while defaulting on a card is unlikely to cost you the house.
A HELOC or home equity loan is the main alternative. On a paid-off home it would be your only lien, and it can suit a smaller, flexible draw. Lenders typically want you to keep at least 10% to 20% of the home’s value as equity under any of these options. For a larger draw, Lendmire’s piece FHA Cash-Out vs Second Lien for a Large Draw on a Paid-Off Home walks through that trade-off.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
The Verdict
Neither option is better in general. FHA is the tool for owner-occupants whose credit or debt ratios make conventional hard, and who accept mortgage insurance as the cost. Conventional is the tool for stronger files, second homes, and borrowers who want no mortgage insurance at 80% LTV or below. If you can qualify for both, run them against each other on the same appraised value and compare the insurance line to the credit and occupancy terms.
If you are weighing a cash-out refinance on a home you own outright, Lendmire can help you compare the programs and the equity each one reaches.
Frequently Asked Questions
Can I do a cash-out refinance if my home has no mortgage?
Yes. A new first lien on a free-and-clear home is treated as a cash-out refinance under both FHA and conventional programs. The leverage cap and cash-out underwriting apply, and the appraisal sets the maximum loan.
Is the FHA cash-out limit 80% or 85%?
It is 80%. HUD lowered the cap in a 2019 HUD mortgagee letter. Older pages and archives may still show a higher figure, but it is obsolete.
Can I use FHA cash-out right after buying a home with cash?
Generally not. FHA requires the home to be owned and occupied for 12 months before the case number is assigned, with a carve-out for certain inherited homes. The delayed financing exception is a conventional rule, not an FHA one.
Does conventional cash-out have mortgage insurance?
Typically not at 80% LTV or below, since conventional mortgage insurance applies above 80%. FHA charges an upfront premium of 1.75% plus an annual premium regardless.
Can I take cash out of a second home or rental with FHA?
No. FHA cash-out is for your owner-occupied principal residence. Conventional allows other occupancies at lower leverage caps.
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.
For current guidelines, see FHA loan programs.
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References
1. CFPB
2. HUD Mortgagee Letter 2019-11
3. Fannie Mae Eligibility Matrix
4. Fannie Mae Selling Guide B2-1.3-03
5. Fannie Mae cash-out seasoning announcement
6. CFPB: cash-out refinances and non-mortgage debt
This article is part of Lendmire’s FHA Loan series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: Conventional Cash-Out vs FHA Cash-Out on a Condo · How to Document an Inherited Home for an FHA Cash-Out · How to Borrow Against a Paid-Off Home With an FHA Cash-Out
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.