Conventional vs FHA Cash-Out Refinance for Maximum Equity Access

The Quick Read: On a one-unit primary residence, both options reach the same ceiling: 80% of the home’s appraised value. So neither one gives you more equity on leverage alone. The difference is who qualifies, what mortgage insurance does to the balance, and which occupancy and property types are allowed. FHA tends to fit borrowers with thinner credit or higher debt ratios. Conventional tends to fit borrowers with stronger files who want to avoid FHA’s premium structure. All figures are subject to lender guidelines and full file review.

Here is the plain version of who each option is for.

FHA is built for owner-occupants. It can work when credit is more modest or debt ratios run higher, because the program allows documented compensating factors. The cost is a mortgage insurance premium that is financed into the loan and charged again each year.

Conventional covers more ground. It can be used on a primary home, a second home, or a rental. Across the wholesale programs Lendmire works with, strong-credit borrowers with real equity often find it the cleaner path, because a cash-out at the 80% cap usually carries no private mortgage insurance. Often is not always. The file decides.

Side-by-Side

Conventional here means loans sold to Fannie Mae or Freddie Mac. The conventional leverage figures above come from Fannie Mae’s Eligibility Matrix, which sets 80% for a one-unit primary residence and 75% for two to four units, second homes, and one-unit investment properties.

Why the 80% Cap Matches (and Where the Myth Comes From)

Many borrowers still believe FHA lets you pull out more equity. That was true once. HUD Mortgagee Letter 2019-11 cut the FHA cash-out maximum from 85 to 80 percent of adjusted value. HUD said the change was meant to reduce risk to the FHA insurance fund. The rule was folded into the Handbook through a Handbook 4000.1 update.

Another myth: FHA allows 90% LTV at low scores. HUD’s credit score guidance does set a 90% limit for scores in the 500-579 range. That is HUD’s general purchase and refinance cap for low scores, not a cash-out allowance. Cash-out stays at 80%. And the wholesale programs Lendmire places FHA loans with start at a 580 decision score, so the lower tier is not something the network reaches. HUD notes the policy applies to case numbers assigned before a stated date, so it may change. Check the current text. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.

Because the ceiling is equal, “maximum equity access” really means net cash. Appraised value times 80%, minus the payoff, minus costs, minus any premium financed into the loan. That last item is where the two programs split.

How Mortgage Insurance Changes the Cash You Keep

FHA carries an upfront premium of 1.75% of the base loan amount, and the program lets you finance it. Financing it raises the balance, which trims your net equity and cash. On top of that comes an annual premium, which ranges from 0.15% to 0.75% of the balance depending on term, loan amount, and LTV. On a thirty-year loan above 90% LTV, that annual premium lasts the full term. At or below 90% LTV, it ends after eleven years. A cash-out sits at 80%, so the shorter schedule is the one most cash-out files see, but the file confirms it. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.

Conventional works differently. Private mortgage insurance applies only when the final LTV is above 80%. A cash-out at the cap generally does not trigger it. Conventional loans do use loan-level price adjustments tied to credit score and LTV, and those exist whether or not you can see them. The price shows up in the pricing on your Loan Estimate, not as a line called “insurance.”

So the honest comparison is not “FHA has insurance, conventional doesn’t.” It is two different cost structures. Compare the Loan Estimate for each, side by side, and look at the cash to you at the bottom.

When Conventional Is the Better Fit

Conventional usually wins when the borrower has solid credit, moderate debt, and wants to avoid a premium that sticks around. A few patterns:

• Strong credit, comfortable ratios. When the automated finding approves cleanly, there is little reason to take on FHA’s premium.
• Second home or rental. FHA is owner-occupied only. Per HUD’s handbook language, FHA single family programs are limited to one- to four-family principal residences. Occupancy decides the leverage, and a second home or rental runs through conventional at 75% on a one-unit.
• Debt consolidation with a long horizon. If you plan to hold the loan for years, avoiding a premium that stays on the balance can matter.
• Buying out a co-owner or paying off a second lien. Fannie Mae’s cash-out rules exempt subordinate liens and legal co-owner buyouts from the 12-month note-age test.

The catch: conventional asks more of the file. Reserves can apply, and on casefiles with debt-to-income above 45%, Fannie Mae’s guide calls for six months of reserves on a cash-out. Reserves documentation is where these files stall, so line up statements early.

When FHA Is the Better Fit

FHA tends to win when credit is thinner, ratios are tighter, or past credit events are in the file.

• Lower credit scores. A 580 decision score reaches the program’s top leverage tier in the wholesale channel. Some conventional lenders set a higher floor, and lenders may layer their own minimums on top of any agency rule.
• Higher debt ratios. The base pair is 31/43, and documented compensating factors can reach 40/50 at the top tier. The automated finding governs most files.
• Recovering credit. HUD’s waiting periods are two years from a chapter 7 discharge and three years from a foreclosure. Those are HUD rules, not a promise from any lender. Conventional waiting periods are generally longer.
• Non-occupant help. A non-occupant co-borrower is allowed on FHA, which can matter on a thin file.

The catch: FHA’s occupancy and seasoning rules are firm. At least one borrower must have owned and occupied the home as a principal residence for 12 months before the case number is assigned, and payment history on the current loan gets reviewed. Someone who bought recently cannot take cash out early. The FHA cash-out refinance program page lays out the mechanics.

The Seasoning Tests Side by Side

Both programs can block an early cash-out. FHA looks at your ownership and occupancy for 12 months. Conventional looks at the age of the loan being paid off: the note must be at least 12 months old, and at least one borrower must have been on title for six months before disbursement. A home listed for sale must come off the market by disbursement.

Buyers who paid cash have a conventional exception called delayed financing. Fannie Mae allows a cash-out within six months of an arm’s-length cash purchase if its conditions are met. FHA’s own occupancy and seasoning rules still apply on the FHA side, so the exception does not carry over.

One more term worth knowing: a refinance that only pays off the first mortgage and costs, with minimal cash back, is treated by Fannie Mae as limited cash-out, with different rules. FHA’s equivalent is a no-cash-out product with its own limits and premium structure. Check which bucket your goal falls in before you compare programs.

Key Terms Defined

LTV (loan-to-value): the new loan balance divided by the home’s appraised value.

Cash-out refinance: a new, larger mortgage that pays off the old one and hands you the difference in cash.

Upfront mortgage insurance premium: a one-time FHA charge of 1.75% of the base loan, usually financed into the balance.

Annual premium: the ongoing FHA insurance charge, billed monthly as part of the payment.

Seasoning: how long you must have owned the home, lived in it, or held the loan before a cash-out is allowed.

Loan-level price adjustment: a pricing add-on in conventional loans that depends on credit score and LTV.

A Scenario, Without the Dollars

Picture a homeowner in a one-unit primary residence with a 700-plus score and moderate debts, who wants to consolidate balances. At 80% LTV on either program, the leverage is identical. Conventional avoids a financed premium, so the net cash and the balance are cleaner. Now change one thing: the same homeowner has a 590 score and a debt ratio near the high end. Conventional may not approve, or may price it heavily. FHA’s flexibility could be the only path that works, and the premium becomes the price of access. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.

And one more: the same owner lives in a duplex. Conventional caps at 75%. FHA applies its 80% rule. In that narrow case, FHA reaches a little more.

Costs and Risks Worth Weighing

The CFPB cautions that turning unsecured debt into mortgage debt secured by the home can put the home at risk if payments become unsustainable. Its research on cash-out refinances found paying off other debts was the most common reason borrowers took cash out, with home repairs second. Credit scores often rise after a cash-out, then drift back down.

Closing costs and any financed premium reduce what you receive.

The Balanced Verdict

Neither program wins on equity access. Both stop at 80% on a one-unit primary home. Conventional is usually the better fit for stronger files and for second homes. FHA is usually the better fit for borrowers who need flexible credit and ratio treatment and who live in the home. Check the current HUD handbook text before relying on any rule, since HUD revises Handbook 4000.1 on a regular basis.

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 a conventional-side walkthrough, see Lendmire’s piece How to Pull Maximum Equity With a Conventional Cash-Out Refinance.

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.

For current guidelines, see FHA loan programs.

References

1. Fannie Mae Eligibility Matrix

2. HUD Mortgagee Letter 2019-11

3. HUD Handbook 4000.1 Update 7.5 transmittal

4. HUD FHA minimum credit score Q&A

5. Fannie Mae Selling Guide B2-1.3-03

6. Fannie Mae Selling Guide B2-1.3-02

7. CFPB: CFPB Cash Out Refinances and Paydown Behavior of Non Mortgage Debt Balances

8. Handbook 4000.1