FHA Cash-Out Refinance vs Conventional Cash-Out That Rolls Closing Costs Into the Loan

The Quick Read: It depends on your credit profile and how much equity you want to keep. FHA cash-out tends to fit borrowers whose credit or debt ratios are tighter, and it reaches up to 80% of the home’s value. Conventional cash-out tends to fit borrowers with stronger credit who want to avoid FHA’s two-part mortgage insurance. Both let you finance closing costs, but financed costs eat into the same borrowing cap, so they shrink your cash in hand either way. All figures are subject to lender guidelines and full file review.

Side-by-Side

Here is how the two lanes compare on the points that usually decide the choice. Program figures reflect what the wholesale lenders Lendmire works with generally apply, and a given lender may set stricter overlays.

Two rows deserve a closer look. First, the FHA leverage cap. HUD cut the maximum on FHA cash-out refinances from 85% to 80% after cash-out refinances of FHA loans had grown sharply, so the old idea that FHA lets you borrow more than conventional is out of date. Second, the conventional cap. The exact leverage and minimum credit score live in the Fannie Mae Eligibility Matrix. For a one-unit primary residence, the equity cushion left behind is broadly similar to FHA’s. Second homes and investment properties face tighter limits.

What Does “Rolling Closing Costs In” Actually Mean?

Rolling costs in means the new loan balance includes your closing costs instead of you paying them in cash. The Fannie Mae Selling Guide explicitly lists financing closing costs, points and prepaids as an acceptable use of conventional cash-out proceeds. FHA works the same way in practice, and the 1.75% upfront premium is typically financed on top.

Here’s the catch. The new loan has to cover three things: the payoff of your old lien, any financed costs, and the cash you take. Once the loan is at the cap, every dollar of financed cost is a dollar less in your pocket. Say a home appraises at a given value and you borrow to the 80% ceiling. If costs are financed, your cash-out shrinks by exactly that amount. The cap covers the entire new loan, not just the cash portion.

When an FHA Cash-Out Is the Better Fit

FHA tends to fit when your credit or debt ratios are the limiting factor. Across the wholesale programs Lendmire places files with, FHA starts at a 580 decision score. The base ratios are 31/43 with no compensating factors, while documented compensating factors can stretch that to 40/50 at the top tier, though the automated finding governs most files. Conventional programs generally ask for stronger credit and may require extra reserves when debt ratios run high.

This lane often suits a borrower who:

• Has a score in the lower range that conventional lenders would price harshly or decline
• Carries higher monthly obligations relative to income
• Has lived in the home as a principal residence for at least 12 months
• Wants to consolidate debt or fund repairs and is comfortable with mortgage insurance for the long haul

The ownership test deserves attention. The 12 months of ownership and occupancy count back from case-number assignment, not from closing. If you inherited the home and rented it out, you generally need to live there for 12 months before a standard FHA cash-out is available. That detail trips up borrowers who assume the clock starts when they apply.

The cost side matters too. FHA charges an upfront premium of 1.75% of the base loan, usually financed, plus an annual premium that runs between 0.15% and 0.75% of the balance depending on term, amount and LTV. On a thirty-year loan above 90% LTV, the annual premium lasts for the term. At or below 90% it ends after eleven years. Because the FHA cash-out is capped at 80% LTV, many of these loans land in that second bucket, though the final structure depends on the file. HUD revised the annual premium schedule in a mortgagee letter effective for later case numbers, so older articles quoting different figures are likely stale.

FHA is also a one-lane program for owner-occupants. It does not apply to second homes or rentals. If occupancy is your plan, that’s fine. If not, the program is simply off the table.

When a Conventional Cash-Out Is the Better Fit

Conventional tends to fit when your credit is strong and you want to avoid FHA’s premium structure. Private mortgage insurance is a separate product from FHA’s, and its cost depends on LTV, credit and the insurer. For a borrower with high scores and a healthy equity cushion, that can add up to less over a long hold than FHA’s upfront premium plus annual charge. (Whether it does depends on the quote, so compare both side by side.)

Conventional also offers some flexibility that FHA’s rule does not mirror. The Selling Guide includes exceptions around title seasoning, delayed financing for recent cash purchases, and inheritance or legal awards. The ordinary seasoning test is that the existing mortgage be at least 12 months old, measured from the existing note date to the new note date.

Things to watch on the conventional side:

• Reserves. When automated underwriting shows a debt-to-income ratio above 45%, the Selling Guide calls for six months of reserves.
• Loan-level price adjustments. Certain cash-out transactions carry a pricing adjustment tied to LTV and credit score. It is a pricing mechanic, so ask how it shows up in your quote.
• Ineligible situations. A property listed for sale at disbursement is among the transactions the Selling Guide excludes from cash-out.

Conventional can also give an easier exit from mortgage insurance for many borrowers. If your equity climbs, private insurance can generally be removed, while FHA’s annual premium lasts for the term on a thirty-year loan above 90% LTV and ends after eleven years at or below 90%. If you may refinance again in a few years, that difference matters, but a later refinance brings its own closing costs, which is a price in itself.

Where the Two Lanes Overlap

Both loans size the new balance as a share of appraised value, both allow financed closing costs, and both treat a paid-off home as cash-out. Both leave you with a real equity cushion. Neither is a free way to access money, since financed costs accrue interest for the life of the loan.

One distinction: FHA has a separate rate-and-term refinance that reaches 97.75% on a principal residence occupied for the previous twelve months, but only when no meaningful cash goes to the borrower. And an existing FHA borrower may qualify for the Streamline, which needs no appraisal and requires a net tangible benefit. If you only want a different term or monthly structure, not cash, one of those may beat either cash-out option.

Which One Leaves More Cash in Hand?

Usually it comes down to leverage and what gets financed, not which program name is on the loan. The FHA cash-out reaches 80% LTV, and a conventional cash-out sets its own ceiling through the agency eligibility matrix, so the cap on the total loan may or may not match for a given file. What differs is the load inside that ceiling. FHA’s financed upfront premium takes a slice of it. Conventional may carry price adjustments instead, which show up in cost rather than in the balance.

Consider a borrower weighing both with identical equity. If FHA’s financed premium plus rolled-in costs reaches the cap sooner, the cash received is lower. A strong-credit borrower might see conventional reach a similar balance with a lower overall carrying cost. A lower-credit borrower may find conventional is simply not on offer, which makes the comparison moot. In that case credit decides before cost does.

Whether FHA’s financed premium interacts with the 80% test in a particular file is something to confirm on the Loan Estimate, since lender treatment and the details of HUD’s rules matter.

Key Terms Defined

Cash-out refinance. A new mortgage larger than your current payoff, with the difference paid to you.

Upfront premium (UFMIP). FHA’s one-time insurance charge, 1.75% of the base loan, typically financed into the balance.

Annual premium (MIP). FHA’s ongoing insurance charge, billed monthly on top of principal and interest.

LTV. Loan-to-value, the new loan balance as a share of appraised value.

Loan-level price adjustment. A pricing add-on applied by conventional agencies for factors such as LTV and credit score.

Case number. The FHA file identifier whose assignment date starts the 12-month ownership and occupancy count.

A Balanced Verdict

Choose FHA cash-out when credit or ratios are the constraint, you have owned and lived in the home for 12 months, and you accept FHA’s mortgage insurance. Choose conventional when your credit is strong, you want insurance that may be removable, or you want the flexibility of its exceptions. Skip FHA if the property is not your principal residence. Skip conventional if your score or ratios make the quote impractical.

The financing-costs question is secondary but real. Rolling costs in preserves cash at the table and costs more over time. If you plan to stay in the loan a long time, paying some costs up front may serve you better. If cash is tight and the plan is short, financing can make sense.

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. See Lendmire’s FHA cash-out refinance program page for the FHA side, or read Lendmire’s piece on the best cash-out refinance program that rolls closing costs into the loan amount for the conventional angle.

For your own numbers, request a scenario review with Lendmire.

For current guidelines and terms, see Lendmire’s FHA loan programs page.

About Lendmire

Lendmire is a mortgage brokerage (NMLS# 2371349) licensed for consumer mortgage lending in 16 states, arranging FHA, VA, conventional and jumbo purchase and refinance loans through a wholesale lending network. Eligibility is determined by the lender on each file. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. Fannie Mae Eligibility Matrix

2. Fannie Mae Selling Guide B2-1.3-03

3. HUD Mortgagee Letter 2023-05