FHA Cash-Out vs Conventional Cash-Out When Paying Off a HELOC

The Quick Read: Both programs treat a HELOC payoff as a full cash-out refinance when the line was drawn for anything other than the purchase. FHA is written for the home you live in. Conventional also reaches individually titled rentals, and an LLC-held rental usually points toward a DSCR cash-out instead.

• A HELOC (home equity line of credit) is a revolving line secured by the property. Paying it off with a new first mortgage counts as cash-out, even if no cash comes back to you.
• FHA cash-out is built around owner-occupied principal residences, with a 12-month occupancy history.
• Conventional cash-out can cover an investment property, but the borrower must be an individual and personal income and DTI drive the file.
• A DSCR cash-out qualifies primarily on property-level rental income covering the payment, subject to lender guidelines.
• Neither agency-style path fits an LLC-owned rental well.

The Honest Answer: Who Each Option Is For

FHA cash-out suits a person who lives in the home, has owned and occupied it for a year, and wants to clear a HELOC with one new first mortgage. Conventional cash-out suits someone with strong personal income and credit who holds title in their own name. That can include a rental.

Neither is a great fit for a working investor with a portfolio in LLCs. Both programs underwrite you personally. Income, credit, existing debts, and DTI (debt-to-income ratio, your monthly debts against your monthly income) decide the file.

Investors with several financed properties often hit DTI limits first. The rental’s own income matters less in those files.

A DSCR cash-out flips the question. DSCR stands for debt service coverage ratio, which compares the property’s rent to its full monthly payment. Across Lendmire’s wholesale network, that is the lens for rentals. It does not make DSCR better for everyone. It is a different tool for a different borrower.

Side-by-Side

The FHA and conventional columns show published industry norms. The DSCR column reflects what Lendmire’s wholesale network typically places. Every figure is subject to lender guidelines and a full file review.

PITIA means principal, interest, taxes, insurance, and any association dues. Seasoning is the waiting period a lender wants between two events, such as buying a property and refinancing it.

Why a HELOC Payoff Counts as Cash-Out

A new first lien that pays off a HELOC drawn for something other than the purchase is a cash-out in both programs. A zero balance does not change that. Many borrowers expect the lower-leverage “rate-and-term” label when no cash comes back, but that label is narrow.

Under conventional rules, Fannie Mae’s guide on limited cash-out refinances says only subordinate liens used to purchase the property can be paid off in that category. A HELOC drawn for repairs, another down payment, or personal use pushes the file into full cash-out. FHA lands in the same place.

The label matters because it sets the leverage cap. Cash-out sits at lower caps than rate-and-term.

One more mechanical point. Paying the HELOC to zero does not release the lien. The line must be closed and the lien released, and the new lender will want a payoff statement for it. Skipping that step leaves a second lien on the property.

How FHA Cash-Out Works for a HELOC Payoff

FHA cash-out is limited to owner-occupied principal residences. Per HUD Handbook 4000.1, at least one borrower must have owned and occupied the property as a principal residence for the 12 months before case-number assignment. Lenders check that with employment documents or utility bills.

Leverage is capped at 80% of adjusted value on a cash-out of a principal residence. Orrick’s summary of Mortgagee Letter 2019-11 shows the cap dropped from 85% to 80%, so older advice quoting 85% is outdated. LTV means loan-to-value, the loan balance divided by the property’s value. The handbook also limits the first mortgage plus any subordinate liens to the nationwide mortgage limit.

An FHA file includes mortgage insurance and a full appraisal. The program underwrites you as the occupant. An investment property is not the intended use, and FHA does not insure transactions meant to acquire investment properties.

FHA’s streamline refinance is a separate route. HUD’s streamline page says it applies to existing FHA loans, and investment properties can be refinanced only without an appraisal. Cash back over $500 is not allowed, so it will not clear a non-FHA HELOC.

How Conventional Cash-Out Works for a HELOC Payoff

Conventional cash-out reaches further. Fannie Mae’s cash-out guide sets two clocks. At least one borrower must have been on title for six months. Any existing first mortgage being paid off must be at least 12 months old, measured note date to note date. That second test does not apply to subordinate liens like a HELOC.

On automated underwriting files with a DTI above 45%, six months of reserves are required. Reserves are cash or liquid assets you hold after closing.

Market-wide leverage on a one-unit investment property is lower than on a primary residence. Fannie Mae’s eligibility matrix lists 75% on a one-unit investment cash-out, and 80% on a one-unit principal residence. The two-to-four unit caps differ between published versions, so confirm the current matrix. That is a market figure. For rentals placed through Lendmire’s network, cash-out typically tops out around 75% on standard rentals, with short-term rentals at 70%.

The sharp edge is title. Conventional loans go to natural persons. A rental held in an LLC generally cannot use this program without a deed change. Moving a property out of an LLC can raise due-on-sale and liability questions, and those deserve a lawyer’s review.

When FHA Cash-Out Is the Better Fit

FHA cash-out fits when the home is your principal residence and you have lived there for at least 12 months. It also fits when your credit or income profile is workable for FHA but marginal for conventional. Some borrowers accept mortgage insurance in exchange for that flexibility.

It also suits a borrower who plans to stay and wants to replace a variable-payment HELOC with one structured loan. Pairing a HELOC payoff with a clean owner-occupant file is the program’s natural lane.

Inherited property is a narrow exception. The 12-month occupancy period does not apply to inherited property, but only if the borrower has not treated it as an investment since inheriting. Renting it out after inheritance blocks the exception until 12 months of occupancy.

FHA is a poor fit for a pure rental, an LLC-owned property, or a house you rent out and do not occupy. It also fits poorly when the main goal is clearing a HELOC on investment real estate.

When Conventional Cash-Out Is the Better Fit

Conventional cash-out fits an individual with strong income and credit, a low DTI, and title in their own name. It covers primary residences, second homes, and investment properties. That makes it the more flexible of the two agency-style paths.

It also suits a borrower who has owned the property for at least six months. If the existing first mortgage is also at least 12 months old, that second clock is covered. A HELOC does not trigger that test.

A trust can help. Inheritance and court awards also have exceptions to the title-time rule.

Conventional is a weaker fit when you hold several financed properties and DTI is already stretched. It is also weaker when your income is irregular or self-employed income is hard to document. The file can stall there even if the rental is strong.

When DSCR Cash-Out Is the Better Fit

Say you own a duplex in an LLC and carry a HELOC on it. Neither FHA nor conventional will take that file in its current form. A DSCR cash-out can, subject to program terms.

A DSCR file looks at the rent against PITIA. Clearing 1.00 means rent covers the payment on paper. It is where select programs start, not the standard, and stronger ratios open better leverage and terms. Coverage below 1.00 is a separate path through select lenders in the network, with leverage and terms adjusted.

Clearing 1.00 does not mean positive cash flow. Repairs, vacancy, management, utilities, and capex sit outside the calculation, so size the deal with those in mind.

A few typical ranges across the network, all subject to lender guidelines:

• Cash-out leverage tops out around 75% LTV on standard rentals, with short-term rentals at 70%.
• About six months of seasoning is the common expectation.
• Credit floors vary by scenario in parts of the network; most programs want about 660, and 700 or higher unlocks the strongest leverage tiers.
• Loan sizes run up to $3,000,000 on standard programs (smaller balances available through select lenders).
• Reserves vary by lender, leverage, and loan size, commonly around six months of PITIA.

The strongest files clear two tests: enough equity and enough rental coverage. A bigger cushion never erases a leverage cap, credit floor, or property rule. For the full picture, see Lendmire’s complete DSCR loans guide.

One practitioner pattern shows up often. Investors with a HELOC on a rental often hit DTI trouble first. They have a good property with a strong rent-to-payment ratio, but the personal income side blocks the agency-style loans. In those files the HELOC payoff is part of the cash-out, and the question becomes whether the property can support the full payoff at network leverage.

If the HELOC was a private-note or partner-style obligation instead, Lendmire’s article Cash-Out Refinance vs HELOC for Paying Off a Private Note That Is Due walks through that variant.

A Balanced Verdict

Choose FHA cash-out when you live in the home, you have the 12 months of occupancy, and the HELOC payoff is part of keeping your own residence in order. Choose conventional cash-out when you are an individual borrower with strong income, a manageable DTI, and title in your own name. That can include an individually titled rental.

Choose a DSCR cash-out when the property is a rental, it sits in an LLC, or your personal DTI is the limiting factor. DSCR is not a shortcut. It has its own leverage, credit, and reserve rules, and it does not guarantee a result.

Tax treatment can depend on how the funds are used and how the property is held; investors should keep clear records and speak with a qualified tax professional before relying on any deduction.

The same HELOC payoff can land in three different programs. The deciding questions are who holds title, whether you live in the property, and what your DTI looks like.

If you are weighing a home equity line against a cash-out refinance and want to see how the numbers work, Lendmire can help you compare HELOC options based on the property, the equity available, credit profile, combined leverage, and your goals.

A deeper walk-through of investment-property equity extraction lives in Lendmire’s guide to cash-out refinance on an investment property.

About Lendmire

Lendmire (NMLS# 2371349) is a mortgage broker. Home equity lines of credit — on a primary residence, a second home or an investment property — are arranged through wholesale lenders in Lendmire’s 16 full-service states, and every line is underwritten by the lender under its program guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. Fannie Mae Selling Guide B2-1.3-02

2. HUD Handbook 4000.1

3. Orrick InfoBytes on FHA cash-out LTV