The Quick Read: FHA cash-out against conventional comes down to total cost over the years you keep the loan, not just whether you qualify. When your debt-to-income ratio fits FHA, the first question is whether the same file also fits conventional. If it does, conventional is often cheaper over a long hold. If it doesn’t, FHA is the realistic route, and the job becomes planning how you will eventually leave its mortgage insurance behind.
Key Takeaways
- A debt-to-income fit with FHA proves you can get the loan. It does not prove FHA is the better loan.
- Both programs cap a cash-out on a one-unit primary home at 80% of appraised value. FHA no longer offers extra leverage here.
- FHA charges an upfront premium plus a monthly one. Conventional prices the risk into the loan and drops mortgage insurance at this leverage.
- Your credit score, your remaining equity, and how long you expect to keep the loan decide the winner.
- Check conventional first. Fall back to FHA when the numbers say so.
Which Path Fits Your File?
If you qualify for FHA only, FHA is your path. If you qualify for both, run the cost comparison. If you are borderline on both, fix the file first. The table below gives the short version.
| Your situation | Likely better path | Why |
|---|---|---|
| Fits FHA only | FHA cash-out | Conventional limits on score or DTI block you |
| Fits both | Compare total cost | Holding period decides |
| Borderline on both | Improve the file first | Lower DTI or lift score, then re-test |
| Strong score, solid equity | Lean conventional | No flat insurance premium |
| Lower score, tight DTI | Lean FHA | Wider credit and ratio tolerance |
Every row is a lean, not a verdict. Lenders review the full file, and nothing here is a commitment to lend.
What Each Loan Actually Is
A cash-out refinance replaces your current mortgage with a bigger one and hands you the difference in cash. You borrow against equity, which is the gap between what the home is worth and what you owe.
The Lendmire FHA cash-out refinance program reaches 80% of the home’s appraised value. The home must be your principal residence. You must have owned and occupied it for 12 months before the case number is assigned. A case number is the file ID the FHA assigns to your loan.
A conventional cash-out is a loan that follows the standard guidelines most banks resell to the market. It has its own timing tests, covered below.
Then there is DTI, short for debt-to-income ratio. Add up your monthly debt payments, including the new mortgage. Divide by your gross monthly income. If debts take 43 cents of every income dollar, your DTI is 43%.
FHA looks at two DTI numbers. One covers housing alone. The other covers all debts. The base pair is 31/43 with no extra strengths on the file. Documented compensating factors can stretch it to 40/50 at the top tier. Across the wholesale lenders Lendmire works with, the automated underwriting finding governs most files, so the printed pair is a starting point.
FHA vs. Conventional Cash-Out, Side by Side
Both programs top out at the same leverage on a one-unit primary home. They differ in insurance, credit tolerance, and timing. This table compares the levers that matter.
| Factor | FHA cash-out | Conventional cash-out |
|---|---|---|
| Max financing | 80% of value | 80% (one-unit primary) |
| Credit floor | 580 decision score in this network | Scales with LTV and unit count |
| DTI | 31/43 base, up to 40/50 with factors | Reserves can apply above 45% DTI |
| Occupancy test | Owned and lived in for 12 months | Owned for six months |
| Mortgage insurance | Upfront plus monthly | Generally none at 80% |
| Cost shape | Flat insurance premium | Risk-based pricing |
| Exit | Often needs a refinance | Cancellation rights if PMI applies |
Two notes on that table. The FHA figures come from the programs Lendmire places files with, subject to lender guidelines. The conventional figures come from Fannie Mae’s Eligibility Matrix, which describes the six-month ownership test and its exceptions for inheritance and legal awards.
Why a DTI Fit Alone Is Not a Reason to Choose FHA
A DTI that fits FHA tells you the door is open. It does not tell you the room is the best one. Many borrowers stop at “FHA will take my ratios” and sign. That skips the real question: can the same file also pass conventional?
Here is how that plays out in practice. FHA is more forgiving on debt load and on credit. So a file with heavy monthly debts or a lower score may clear FHA and miss conventional. That borrower should use FHA. No debate.
Now picture a borrower with a decent score, steady income, and a DTI that sits inside both programs. Both doors open. At that point FHA’s flexibility is worth nothing, because you are not using it. You are paying for it anyway, through the insurance premium.
The cost structures differ in shape:
- FHA charges an upfront premium of 1.75% of the base loan, which can be financed into the balance. Financing it raises what you owe. It also charges an annual premium, between 0.15% and 0.75% of the balance depending on term, loan amount, and LTV. You pay it monthly.
- Conventional charges private mortgage insurance only when the loan is above 80% of value. At the 80% cash-out cap, it generally does not apply. The cost shows up instead as risk-based price adjustments tied to your score and leverage. Fannie Mae’s pricing matrix works this way, and it excludes FHA loans.
So “no mortgage insurance” on conventional does not mean “no cost.” The cost moves into the price of the loan. The honest comparison happens on the Loan Estimate, not in the marketing.
Stronger scores generally favor conventional pricing. Lower scores or tight ratios generally favor FHA. The middle is where the work is.
A Cost Comparison Without the Dollar Signs
Think of the two loans as different shapes of cost. FHA front-loads 1.75% and then adds a monthly premium. Conventional charges through pricing on the loan itself, with no separate insurance line.
Take a one-unit primary home and a cash-out at 80% of value, with a decision score that clears both programs. On a thirty-year FHA loan at or below 90% LTV, the annual premium generally ends after eleven years. Above 90% it lasts the full term. At this cash-out cap, you land in the eleven-year group.
That gives you a way to think about holding periods:
- You may refinance or sell within a few years. The upfront premium and pricing differences dominate. The recurring FHA premium barely has time to add up.
- You plan to keep the loan for a decade or more. The monthly premium keeps running, so it compounds into a larger cost. This is where conventional tends to pull ahead if your file supports it.
- You are not sure. Plan for the longer hold. It is the more expensive mistake.
The breakeven is the point where one loan’s total cost passes the other’s. You find it by asking each program’s Loan Estimate for the full cost, then comparing over your expected years. No national average can stand in for your file.
One more cost sits outside either column. Financing the upfront premium makes the FHA balance bigger. A bigger balance means less cash in your pocket against the same 80% cap, or more owed for the same cash. Run that math before you decide.
A Decision Walkthrough, in Order
Work through these steps in sequence. Each one can end the question early.
1. Test DTI first. Add all monthly debts plus the new housing payment. Divide by gross monthly income. Note whether you land inside FHA only, both, or neither.
2. Check conventional’s DTI and reserves. Fannie Mae’s matrix shows reserves can apply to a cash-out file when DTI is above 45%. Having reserves on hand matters.
3. Look at credit. FHA is wider here, with a 580 decision score as the entry point in the programs Lendmire places with. Conventional minimums scale with leverage and unit count. Some lenders set a higher floor than the published one. Describe your score honestly before assuming a program works.
4. Count your equity. Both cap at 80% on a one-unit primary home. If your equity barely clears that cap, small differences in appraisal matter more.
5. Check seasoning. FHA looks at 12 months of ownership and occupancy. Conventional looks at six months of ownership. The existing first mortgage on a conventional cash-out must also be at least 12 months old, measured note date to note date, per Fannie Mae’s announcement on cash-out loan age.
6. Set your horizon. How long will you keep this loan? That sets how much the monthly premium matters.
7. Compare both Loan Estimates. Read the full cost, not one line.
The Middle Case: Borderline, So Fix the File First
Some borrowers fit neither program cleanly. A DTI just above the line is the most common version. Before you apply, there are ways to bring it down.
Paying off debts with the cash-out proceeds is the usual move. Each debt you retire removes its monthly payment from your ratio. A card with a high minimum payment can swing DTI more than a large loan with a small payment. The lender counts the new mortgage payment, so run the whole picture, not just the debts you pay off.
You can also lift income that is documented and stable. Lowering the loan amount helps too, since a smaller loan means a smaller payment.
Be careful with consolidation. Turning unsecured debt into debt secured by your home trades flexibility for risk. If you fall behind, the home is the collateral. A longer term can also raise total cost even when the monthly payment drops. That is a real cost, not a technicality.
Re-test after the changes. Sometimes a file that was FHA-only becomes a both-programs file. That is the moment the comparison above pays off.
Switching Later and Getting Out of Insurance
Conventional mortgage insurance has legal exits. Under the CFPB’s rules on removing PMI, you can ask to cancel at 80% of the original value. The servicer must cancel automatically at 78%.
FHA insurance works differently. Those cancellation rights cover PMI, not FHA premiums. Fannie Mae’s consumer site notes that removing FHA mortgage insurance is more complicated and may involve refinancing. So build a future refinance into your plan if you choose FHA. It is a cost to model today.
At 80% LTV on a thirty-year loan, the FHA annual premium generally ends after eleven years, as covered above. That is a program fact, not a promise about your loan. Confirm the exact terms for your file.
Where the General Rule Breaks
A few edge cases change the answer.
- Old advice about 85%. FHA used to allow 85% on cash-out. HUD’s Handbook 4000.1 Update 7.5 lowered it to 80%. Articles still describing FHA’s extra leverage are outdated.
- Inheritance. Conventional waives the six-month ownership clock for inherited homes. FHA has an inheritance exception too, but it depends on the home never having been treated as an investment.
- Delayed financing. A cash buyer within six months of purchase can use conventional delayed financing, subject to the guide’s documented-investment cap on the loan amount.
- Existing FHA loan. A streamline refinances an existing FHA loan with no appraisal, a limited credit review, and a net tangible benefit. The premium continues. A cash-out is not a streamline. If you only want a lower payment and have an FHA loan, ask whether streamline fits instead.
- Second homes and multi-unit. If the property is not your primary home, occupancy decides the leverage, and conventional limits are lower. Multi-unit and manufactured homes have their own tighter conventional limits.
- Lender overlays. A published floor is not what every lender requires. Some add their own credit minimums above the agency’s.
- Meeting the cap. Fitting under 80% does not mean a certain amount of cash or an approval. Lenders also weigh the appraisal, income, the new payment, and total costs.
County loan limits also apply to FHA and conventional loans, and they change every year. Check yours before assuming the loan amount works.
Key Terms Defined
DTI (debt-to-income ratio): Your monthly debt payments divided by your gross monthly income, shown as a percentage.
LTV (loan-to-value): The loan amount divided by the home’s appraised value.
Cash-out refinance: A new mortgage that pays off the old one and gives you the difference in cash.
Seasoning: The waiting period a lender requires, such as owning or living in the home for a set time before refinancing.
Upfront mortgage insurance premium: FHA’s one-time charge of 1.75% of the base loan, which can be financed into the balance.
Annual mortgage insurance premium: FHA’s recurring charge, billed monthly, based on term, loan amount, and LTV.
PMI (private mortgage insurance): Insurance on a conventional loan above 80% LTV that can be cancelled by law.
Compensating factors: Documented strengths, such as cash reserves or a strong payment history, that can offset a higher DTI.
Frequently Asked Questions
Is FHA cash-out cheaper than conventional if my DTI fits FHA?
Usually not, when your file also fits conventional. FHA’s advantage is flexibility on credit and ratios. If you do not need that flexibility, you pay for it in insurance premiums. Compare both Loan Estimates over the number of years you expect to keep the loan.
Can I borrow more on FHA than on conventional?
Not on a one-unit primary home. Both cap cash-out at 80% of appraised value. FHA’s old 85% limit ended with a HUD policy change, so older articles claiming an FHA leverage edge are out of date. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.
Does FHA mortgage insurance end when I reach 20% equity?
Not automatically. The CFPB’s cancellation rules cover PMI, not FHA insurance. Many borrowers refinance to remove it sooner, which is a cost to plan for.
What if my credit is fine but my DTI is borderline?
Work on DTI before you apply. Paying off debts with the proceeds, lowering the loan amount, and documenting stable income can all help. Then test both programs again, since a small DTI change can move you from FHA-only to both.
Can I switch from FHA to conventional later?
Yes, through a refinance, if you qualify at that time. Many FHA borrowers plan this once they build equity and improve their score. The cost to refinance should be weighed against the premium you would otherwise keep paying.
Your Next Step
If you are weighing a cash-out refinance on the home you live in against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches. When your Loan Estimates arrive, read the insurance line, the pricing line, and the total cost over your holding period, not just the monthly payment.
For your own numbers on your primary residence, 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.
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References
1. Fannie Mae Eligibility Matrix
2. Fannie Mae’s pricing matrix
3. Fannie Mae announcement on cash-out refinance loan age
4. CFPB: When can I remove private mortgage insurance (PMI) from my loan?
5. HUD Handbook 4000.1 Update 7.5 transmittal
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: Can You Get an FHA Cash-Out After a Conventional Denial? · Should You Stay With an FHA Cash-Out or Move to Conventional? · Should FHA Homeowners Use a Conventional Cash-Out Refinance for Debt?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Important disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage brokerage. Lendmire is not a direct lender, depository institution, or financial advisor. All loan inquiries are subject to lender underwriting; this article does not constitute a commitment to lend. Rates, terms, and program guidelines are subject to change without notice and vary by borrower profile, property type, and state. Information in this article is general in nature and is not financial, legal, or tax advice. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.