The Quick Read: An FHA cash-out refinance either pays off your HELOC from the new loan’s proceeds, which shrinks your cash, or leaves the line open behind the new first mortgage, where its full credit limit, not its drawn balance, counts toward FHA’s combined loan-to-value cap. The program exists only for a home you live in as your principal residence. Once the property is a rental, FHA cash-out is off the table, and a DSCR cash-out is the usual path.
- Occupancy decides everything. FHA cash-out is for owner-occupied primary residences. Rentals and second homes are not eligible.
- Payoff comes out of your cash. Every dollar that retires the old first mortgage or the HELOC is a dollar you do not receive.
- An open line counts at its limit. A zero balance does not make a HELOC disappear from the leverage test.
- Subordination is the HELOC lender’s call. If it refuses, the line must be paid off and closed, or you need a different route.
- Rentals move to DSCR. Rent-based cash-out replaces personal-occupancy rules once the home is an investment.
Key Terms Defined
Seven terms drive this topic. Each is defined here once.
- HELOC: A home equity line of credit, a revolving credit line secured by your home that you draw on as needed.
- Subordinate lien: A loan that sits behind the first mortgage in repayment priority. Most HELOCs are subordinate liens.
- Subordination agreement: A signed document in which the HELOC lender agrees to stay behind the new first mortgage.
- CLTV (combined loan-to-value): All loans on the home added together, divided by the home’s value.
- Cash-out refinance: A new mortgage larger than the debt it replaces, with the difference paid to you.
- PITIA: Principal, interest, taxes, insurance, and any association dues. It is the full monthly housing obligation.
- DSCR (debt service coverage ratio): A property’s monthly rent divided by its PITIA. It measures whether the rent covers the payment.
How large a line the equity supports.
An equity line is sized by combined loan-to-value, occupancy, and credit — not by rental coverage. Switch the occupancy or the credit band and the ceiling moves with it.
Investment-property lines require a 700 minimum credit score; second-home lines start at a 640 minimum and primary-residence lines at 600, and the combined-LTV ceiling steps down as the credit band drops on primary-residence and second-home lines and holds on investment-property lines; the line cap steps down on primary-residence lines and holds at every tier on investment-property and second-home lines.
A debt-to-income ratio above 45% requires 680+ credit. Profiles under 640 are limited to single-family homes. At least 75% of the approved line is drawn at closing. Ceilings, floors, and caps update from Lendmire’s centralized guideline source.
Line estimate
Illustrative estimate only — not a quote, Loan Estimate, approval, or commitment to lend. The rate is an editable assumption; equity-line pricing is variable through both the draw and repayment periods and never converts to fixed. Occupancy and credit drive the ceiling together: an investment property tops out at 70% combined LTV (minimum credit 700, line cap $500,000); a second home tops out at 90% combined LTV (minimum credit 640, line cap $500,000), with the ceiling stepping down as the credit band drops (the cap holds at every tier); a primary residence tops out at 90% combined LTV (minimum credit 600), and its $750,000 maximum line is available only at 75% combined LTV or below with a 700-or-better credit profile (720 on the longer-runway program) and a full appraisal. Lines above $500,000 require a full appraisal. Credit, debt-to-income, property type, and full underwriting review all affect the final line.
Who Can Use FHA Cash-Out at All?
Only owner-occupants. FHA cash-out is limited to a principal residence you own and live in. If you moved out and kept the home as a rental, you do not qualify, however much equity it holds.
Consumer-finance guidance agrees. Experian’s FHA cash-out guide says investment properties and second homes are not eligible. It also describes a 12-month residence requirement and a clean payment history, with inherited property as the exception.
Those two checks come first, before any HELOC question. You need to have owned and occupied the home long enough, and your mortgage payments need to be current. Most files stall on occupancy history, not paperwork.
How FHA Treats an Existing HELOC
FHA’s own guidance gives three rules. First, a HELOC can stay in place behind an FHA-insured first mortgage only if the new loan plus the entire subordinate lien fits within FHA’s allowed loan-to-value limits. Second, the lender counts the HELOC’s maximum accessible credit limit in that test. Third, the HELOC holder must agree to subordinate.
Those rules appear in HUD’s refinance handbook text, which governs FHA. That document is older guidance. HUD has since consolidated its handbook, so ask your FHA lender to confirm the current wording before you rely on any detail here.
The same text includes a draw look-back for no-cash-out refinances. Money advanced on the line in the prior 12 months, beyond $1,000 and other than for repair or rehabilitation, cannot be rolled into the new mortgage. The practical lesson is that recent HELOC draws push a payoff toward cash-out treatment.
Compare how a conventional lender thinks about it. In conventional lending, what the line paid for often decides the classification. A line that funded the purchase is treated differently from one that funded a remodel or a vacation. For FHA, ask your lender how a purchase-money line is treated before you plan around it.
The Four Things You Can Do With the Line
You have four choices. The table shows what each requires and what it does to your cash.
| Option | Who must agree | Effect on your cash |
|---|---|---|
| Pay off and close | Nobody; get a closure letter | Cash drops by the full payoff |
| Pay off, keep open | HELOC lender, via subordination | Cash drops; limit still counts |
| Reduce the limit | HELOC lender | Smaller limit counts in CLTV |
| Keep it, subordinate | HELOC lender signs | No payoff; limit eats loan room |
Two of these deserve extra attention. Paying off and closing is the cleanest path. The line vanishes, its limit stops counting, and you owe one payment instead of two. The cost is that the payoff comes out of your proceeds.
Keeping the line open is the hardest path. The new first mortgage and the HELOC’s entire limit must fit under the cap together. And the HELOC lender has no obligation to sign. Many borrowers who want to keep a line find that the full-limit test leaves little room for cash.
How the Math Works With a HELOC in It
FHA sets a maximum loan amount as a percentage of the appraised value. FHA later lowered that percentage, and older pages still show a higher number, so confirm today’s cap with your lender before planning anything. The structure of the math does not change. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
Run the numbers this way. Start with the room under the cap. Subtract the payoff of your current first mortgage. Subtract the HELOC if it is being paid off. Subtract the financed upfront mortgage insurance premium and closing costs. What remains is your cash.
Now keep the HELOC open. Its full limit, not the drawn balance, comes off the room before you count any cash. Picture a line with a large limit and a tiny balance. It looks harmless, yet it can consume the room that would have been your proceeds.
There is also a timing wrinkle on recent purchases. If you bought the home within the past year, FHA’s refinance reference calculates value on the lesser of the appraised value or the original sales price. That is described in HUD’s archived refinance guide, which still shows an older, superseded cap. Treat it as a description of how the test is built, not of today’s percentage.
Mortgage insurance also trims your net cash. FHA charges an upfront premium on a cash-out loan, and the borrower usually finances it into the new balance. That financed premium uses up part of the room under the cap, so it comes off your proceeds just as the payoffs do. FHA also adds an ongoing annual premium to the monthly cost. Ask your lender for the current premium schedule, and check HUD’s handbook for the exact premium terms.
Does Paying Off the HELOC Change the Loan Type?
Sometimes. A payoff does not automatically make a refinance cash-out or no-cash-out. The use of the line matters. A line that bought the home reads differently from one that funded other spending, and recent draws count against you.
For that reason, gather the line’s draw history before you apply. A lender reads those statements to decide how to label the transaction, and the label changes the cap and the cash you can take.
What Your File Needs
Expect the lender to ask for the following.
1. A current payoff statement for the first mortgage. FHA’s refinance reference requires one, and you must be current for the month due.
2. The HELOC’s latest statements, showing the credit limit and draw history.
3. A HELOC payoff figure and, if the line will close, a written closure or lien-release letter.
4. The purchase closing paperwork if the HELOC funded the home.
5. A new FHA appraisal, which sets the value.
6. Your credit, income, and debt documentation, since FHA qualifies you personally.
On a 3-4 unit property, FHA’s refinance reference also notes a self-sufficiency test and a reserves requirement. Non-occupant co-borrowers cannot be added to meet credit guidelines on a cash-out.
The Closing Sequence
The order of steps matters. Skip one and the file stalls.
1. Request the HELOC payoff and ask the line to be frozen so no new draws post.
2. Stop drawing. A new draw after the payoff quote changes the number the settlement agent needs.
3. The title company sends the payoff and a closure request to the HELOC holder.
4. At settlement, the payoff is wired from your loan proceeds.
5. The HELOC holder issues a lien release. Confirm you receive it, because a paid line that is never closed can keep counting against you.
Per-diem interest keeps accruing on the line until the payoff posts, so the settlement figure is always a little higher than the quote.
Where the General Rule Breaks
A few situations bend the usual answers.
A zero-balance HELOC. It still counts at its limit and still needs to be closed or subordinated. Unused is not the same as gone.
Recent HELOC draws. The 12-month look-back can limit what rolls into the new loan and can push the transaction toward cash-out treatment.
A purchase-money piggyback. Some buyers used a second loan at purchase instead of a larger down payment. Treatment of those liens differs across loan types, so ask the FHA lender how a purchase-money line is handled before you assume it is free to pay off.
Inherited property. HUD’s archive says a home inherited within the past 12 months can be cash-out refinanced if you have lived in it as a primary residence since the inheritance.
A former owner-occupant who now rents. Occupancy history governs. HUD’s refinance guidance treats former investment properties by their occupancy record, so your intentions do not change the answer.
A HELOC lender that refuses. You then have three exits: pay the line off and close it, pay it down far enough that a smaller limit fits, or choose a different loan.
When the Home Becomes a Rental
FHA cash-out stops working the moment the property is not your principal residence. That is where DSCR cash-out comes in. DSCR loans are designed for non-owner-occupied investment properties. Because they are business-purpose investor loans, they are reviewed differently from a standard owner-occupied mortgage.
The lender asks whether the rent covers the payment, not whether your paycheck does. A DSCR loan is reviewed primarily on property-level rental income covering the payment, subject to lender guidelines. Here is how the two compare.
| Factor | FHA cash-out | DSCR cash-out |
|---|---|---|
| Property use | Owner-occupied only | Rental or investment |
| Main test | Your income and credit | Rent vs. PITIA |
| Existing HELOC | Subordinate or pay off | Usually paid off at closing |
| Title holder | Individual borrower | Individual or LLC* |
*Subject to lender program eligibility.
The figures below come from select lenders in Lendmire’s wholesale network. They are typical ranges, not guarantees.
- Cash-out leverage: typically up to about 75% LTV on a standard rental, with roughly 6 months of seasoning expected.
- Coverage: 1.00 is where many select programs start. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted. Stronger ratios open better leverage.
- Credit: most programs want around 660, a 620 floor exists in parts of the network, and 700 or better opens the strongest tiers.
- Loan size: up to $3,000,000 on standard programs (smaller balances available through select lenders).
- Reserves: commonly around 6 months of PITIA. They vary by lender, leverage, loan size, and transaction type.
Clearing 1.00 is not the same as positive cash flow. DSCR compares rent to PITIA only. Repairs, vacancy, management, utilities, and capital spending sit outside the calculation.
Lendmire arranges these loans as a broker through select wholesale lenders, across 41 markets, including Washington, D.C. Network lenders do not offer DSCR on manufactured homes, log homes, or barndominiums. For the full picture of rental-based financing, see Lendmire’s complete DSCR loans guide.
A practical note for investors who hold an open HELOC on a rental. The line is another lien that must be paid off or subordinated in any later refinance. That is a common reason investors retire the line inside a cash-out. A larger down payment or more equity can lift the coverage number, but it never erases leverage caps, credit floors, reserve rules, or property eligibility.
Should You Keep the First Mortgage and Use a HELOC Instead?
Sometimes. A refinance replaces your whole first mortgage with a new one. A HELOC leaves the first mortgage untouched. NerdWallet’s cash-out versus HELOC comparison says a HELOC suits borrowers who want to keep their first-mortgage terms or need flexibility, and notes that HELOC pricing is usually variable.
If the home is now an investment property, the network’s home equity line has tight limits. On an investment property, the ceiling is 70% combined loan-to-value, with a 700 minimum credit score and a maximum line of $500,000. The line can sit in first or second position, and title must be held by you personally or in a revocable living trust. An LLC cannot hold title on these lines, so a property already deeded to an LLC needs a vesting change or a DSCR cash-out instead. Availability is limited to Lendmire’s 16 full-service states, which is narrower than the DSCR footprint.
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.
Common Mistakes
- Assuming an unused line does not matter. It counts at its limit.
- Drawing on the line after the payoff quote. The settlement figure goes stale.
- Trusting old cap numbers. Archived pages still show a higher percentage than FHA allows today.
- Skipping the lien release. Get written proof the line is closed.
- Applying FHA cash-out to a rental. It does not work, whatever your equity.
Frequently Asked Questions
Can I keep my HELOC through an FHA cash-out?
Only if the HELOC holder agrees to subordinate and the new FHA loan plus the entire line fits under FHA’s combined cap. The lender counts the full credit limit, not the balance. If the holder refuses, you pay the line off and close it.
Does a zero balance matter?
Yes. An unused line still counts at its maximum limit in the combined test, and it still has to be closed or subordinated. Ask the line’s lender for a closure letter if you want it gone.
Does the HELOC payoff reduce my cash?
Yes. The payoff comes out of the new loan’s proceeds, along with the old first mortgage, the financed premium, and closing costs. What remains is your cash.
Can I keep drawing on the line before closing?
Stopping is safer. Recent draws can change how the transaction is classified and what the lender allows. A draw after the payoff quote also makes the settlement number stale.
Can I use FHA cash-out on a rental I moved out of?
No. FHA cash-out requires an owner-occupied principal residence, and occupancy history governs. A DSCR cash-out reviews the property’s rent instead, subject to lender guidelines.
Next Step
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. Reach the team at 828-256-2183. Every figure here is subject to lender guidelines and full file review, and nothing here is a commitment to lend.
Investors weighing their equity options can start with 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.
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References
1. Experian FHA cash-out refinance guide
2. HUD refinance handbook text (legacy Handbook 4155.1, Chapter 3, Section B)
3. HUD archived refinance reference guide
4. NerdWallet home equity loan vs. cash-out refinance
This article is part of Lendmire’s home equity line of credit program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Jumbo Cash-Out Refinance Requirements for an Owner With a HELOC · VA Cash-Out vs HELOC for a Veteran Keeping an Existing VA Loan · Should You Use a HELOC or Cash-Out Refinance for an ADU?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.