An FHA cash-out refinance and a conventional cash-out refinance both replace your current mortgage with a larger loan and provide the remaining proceeds in cash after eligible balances and closing costs are paid.
For a one-unit primary residence, both options generally permit a maximum 80% loan-to-value ratio. Their mortgage insurance, underwriting, ownership, occupancy, appraisal and loan-limit rules differ.
FHA vs. Conventional Cash-Out Refinance Basics
| Feature |
FHA Cash-Out Refinance |
Conforming Conventional Cash-Out Refinance |
| Loan structure |
FHA-insured mortgage |
Conventional mortgage eligible under Fannie Mae or Freddie Mac requirements |
| Maximum LTV for a one-unit primary residence |
Generally 80% |
Generally 80% |
| Mortgage insurance |
Upfront and annual FHA mortgage insurance premiums |
Private mortgage insurance generally is not required at 80% LTV or less |
| Ownership and occupancy |
Generally requires 12 months of ownership and principal-residence occupancy, subject to stated exceptions |
Generally requires at least six months of ownership, subject to delayed-financing and other exceptions |
| Payment history |
FHA-specific mortgage payment-history requirements apply |
Payment history is evaluated under applicable conventional underwriting requirements |
| Property review |
FHA appraisal and minimum property requirements apply |
Conventional appraisal, property-condition and eligibility requirements apply |
| Loan limits |
Subject to applicable FHA county loan limits |
Subject to applicable conforming loan limits |
What Is an FHA Cash-Out Refinance?
An FHA cash-out refinance replaces an existing mortgage with a larger FHA-insured loan. After the existing mortgage, eligible liens, closing costs and other required amounts are paid, you receive the remaining proceeds.
You do not need to have an FHA loan before refinancing into an FHA cash-out mortgage. A conventional, VA, USDA or other eligible mortgage may be refinanced into FHA financing when the new transaction satisfies HUD and lender requirements.
FHA underwriting considers your income, employment, debts, credit history, mortgage payment history, property and available equity. FHA’s insurance can provide different underwriting options from conventional financing, but approval is not guaranteed.
What Is a Conventional Cash-Out Refinance?
A conventional cash-out refinance also replaces the current mortgage with a larger loan and provides cash from the difference.
For the comparison in this article, conventional refers to conforming mortgages that follow Fannie Mae or Freddie Mac eligibility requirements. A lender may also offer nonconforming cash-out products with different loan-to-value, credit, property and loan-limit rules.
A conforming conventional cash-out refinance on a one-unit primary residence is generally limited to 80% LTV. Because private mortgage insurance generally applies when a conventional first mortgage exceeds 80% LTV, standard cash-out transactions at or below this limit commonly do not require PMI.
How Much Cash Can You Receive?
The maximum loan amount is based partly on the property’s appraised value and the applicable LTV limit.
Assume the following:
- Appraised home value: $400,000
- Maximum LTV: 80%
- Current mortgage payoff: $220,000
The maximum new loan amount before considering other restrictions would be:
$400,000 × 80% = $320,000
Subtracting the current mortgage produces estimated gross proceeds of:
$320,000 − $220,000 = $100,000
The amount received at closing would be lower after subtracting closing costs, prepaid expenses, other liens and any additional required amounts.
For an FHA loan, the upfront mortgage insurance premium may be financed into the mortgage. The final base loan amount, financed premium and cash proceeds must remain within FHA requirements.
Use a cash-out refinance calculator to compare the estimated new loan balance, payment and available proceeds.
FHA and Conventional Cash-Out LTV Limits
FHA cash-out refinancing generally permits a maximum 80% LTV and combined loan-to-value ratio.
Fannie Mae and Freddie Mac also generally permit up to 80% LTV on a standard cash-out refinance secured by a one-unit primary residence.
Different maximums can apply to:
- Two- to four-unit primary residences
- Second homes
- Investment properties
- Manufactured homes
- Properties with subordinate financing
- Transactions governed by state-specific home equity laws
An 80% maximum means at least 20% of the property’s value remains outside the new first-mortgage balance. It does not guarantee that you can borrow the full 80%. Income, debts, credit, loan limits and other requirements can result in a lower approved amount.
How FHA Mortgage Insurance Affects the Cost
FHA cash-out refinancing requires both an upfront mortgage insurance premium and an annual mortgage insurance premium.
The upfront premium is generally 1.75% of the base loan amount. It can be paid at closing or financed into the mortgage, subject to FHA requirements.
For an FHA mortgage with a term longer than 15 years and an original LTV of 90% or less, annual mortgage insurance generally lasts for 11 years. Because FHA cash-out refinancing is capped at 80% LTV, this 11-year duration commonly applies.
The annual premium rate depends on the loan term, base loan amount, LTV and current HUD premium schedule. The annual premium is generally divided into monthly amounts and included in the mortgage payment.
FHA annual MIP does not follow the same borrower-requested cancellation process as conventional PMI. Review FHA mortgage insurance removal for the rules that apply to different FHA origination dates and loan structures.
Why Conventional Cash-Out Usually Does Not Require PMI
A standard conforming conventional cash-out refinance on a one-unit primary residence generally cannot exceed 80% LTV.
Private mortgage insurance is generally associated with a conventional first mortgage above 80% LTV. As a result, a conforming cash-out loan completed within the standard 80% maximum commonly does not require monthly PMI.
Avoiding PMI does not establish that conventional financing has the lower total cost. Compare the interest rate, annual percentage rate, discount points, lender fees, loan term and total interest with the FHA alternative.
FHA Cash-Out Occupancy Requirements
The property generally must have been owned and occupied by the borrower as a principal residence for the 12 months before the FHA case-number assignment.
If the borrower acquired the property less than 12 months earlier, FHA generally does not permit maximum cash-out financing. Limited exceptions can apply, including certain inherited properties.
Documents used to verify occupancy can include utility bills, employment records, tax documents or other evidence accepted under FHA requirements.
FHA Mortgage Payment-History Requirements
FHA also reviews the payment history for the mortgage being refinanced.
- If the mortgage has existed for at least 12 months, the borrower generally must be current and satisfy FHA’s payment-history requirements for the preceding 12 months.
- If the mortgage has more than six but fewer than 12 months of history, all payments generally must have been made within the month due.
- A mortgage with fewer than six months of payment history is generally not eligible for an FHA cash-out refinance.
Late payments can affect eligibility even when the borrower has enough equity under the 80% LTV calculation.
Conventional Cash-Out Ownership Requirements
For a standard Fannie Mae or Freddie Mac cash-out refinance, at least one borrower generally must have been on title to the property for at least six months before the new loan closes or is disbursed.
Exceptions can apply. One common example is delayed financing after a borrower purchases a property with cash and then obtains a mortgage shortly afterward. Inheritance, divorce-related transfers and ownership through certain entities or trusts can also be subject to separate requirements.
The lender must document that the transaction satisfies the applicable Fannie Mae or Freddie Mac ownership and refinance rules.
How Credit and Debt Requirements Differ
Neither FHA nor conventional cash-out refinancing has one credit score or debt-to-income ratio that guarantees approval.
FHA and conventional underwriting systems evaluate the full loan file, including:
- Credit scores and credit history
- Housing payment history
- Employment and qualifying income
- Monthly debt obligations
- Cash reserves
- Requested loan amount
- Property characteristics
- Loan-to-value ratio
FHA financing can provide a different approval path for some borrowers whose files do not receive acceptable conventional terms. Conventional pricing can be more favorable for borrowers with stronger credit profiles.
Review cash-out refinance credit requirements for additional context.
FHA and Conventional Loan Limits
The 80% LTV calculation is only one limit on the new mortgage.
An FHA cash-out refinance must remain within the FHA loan limit for the county and property size. FHA establishes separate limits for one-, two-, three- and four-unit properties.
A conforming conventional cash-out refinance must remain within the applicable conforming loan limit. A loan above that amount is a jumbo or other nonconforming mortgage and follows different requirements.
When 80% of the appraised value exceeds the applicable program limit, the loan limit becomes the maximum starting point for the new mortgage.
FHA vs. Conventional Appraisal Requirements
Both FHA and conventional cash-out refinances require an acceptable property valuation unless a specific waiver or alternative valuation method is permitted.
An FHA appraisal evaluates market value and whether the property meets HUD minimum property requirements related to safety, soundness and security.
A conventional appraisal also evaluates value, condition and marketability under applicable Fannie Mae, Freddie Mac and lender requirements. Significant defects can affect either type of transaction.
FHA-specific property requirements can create additional repair conditions when the home has issues such as defective paint, missing safety features, exposed wiring or systems that do not function properly.
When an FHA Cash-Out Refinance May Fit
An FHA cash-out refinance may be available when:
- Your application satisfies FHA underwriting but does not receive acceptable conventional terms.
- You have occupied the property as your principal residence for the required period.
- Your mortgage payment history satisfies FHA requirements.
- The property meets FHA appraisal and minimum property requirements.
- The proposed loan remains within FHA’s LTV and county loan limits.
- The total cost remains reasonable after including upfront and annual mortgage insurance.
When a Conventional Cash-Out Refinance May Fit
A conforming conventional cash-out refinance may be available when:
- Your credit, income, debts and mortgage history satisfy conventional underwriting.
- At least one borrower meets the applicable ownership-duration requirement or an exception applies.
- The loan remains at or below the maximum LTV for the property and occupancy type.
- The loan amount remains within the applicable conforming limit.
- You want to avoid FHA upfront and annual mortgage insurance.
- The conventional rate, fees and long-term cost compare favorably with the FHA option.
How to Compare FHA and Conventional Cash-Out Offers
Compare written loan estimates using the same requested cash amount and a similar loan term.
Review:
- Interest rate
- Annual percentage rate
- Principal-and-interest payment
- FHA annual MIP or conventional PMI
- Upfront FHA mortgage insurance
- Discount points
- Lender and third-party closing costs
- Cash received at closing
- Total payments over the period you expect to keep the loan
- How restarting or extending the mortgage term affects total interest
A lower monthly payment can still increase the total cost when the refinance extends repayment over a new, longer term.
Bottom Line
FHA and conforming conventional cash-out refinances generally permit up to 80% LTV on a one-unit primary residence.
FHA requires upfront and annual mortgage insurance and applies specific occupancy and payment-history rules. A conventional cash-out refinance generally avoids PMI at the standard 80% maximum but uses its own credit, ownership, property and underwriting requirements.
Compare the cash received, monthly payment, mortgage insurance, closing costs and total cost over the period you expect to keep the loan.
FAQ
Which Has a Higher Cash-Out Refinance LTV, FHA or Conventional?
For a standard one-unit primary residence, FHA and conforming conventional cash-out refinances are both generally capped at 80% LTV. Different limits can apply to other property and occupancy types.
How Much Equity Do You Need for an FHA Cash-Out Refinance?
An 80% maximum LTV generally requires at least 20% of the property value to remain outside the base mortgage balance. Closing costs, financed FHA mortgage insurance, loan limits and underwriting can reduce the cash available.
How Much Equity Do You Need for a Conventional Cash-Out Refinance?
A standard conforming cash-out refinance on a one-unit primary residence is generally capped at 80% LTV, leaving at least 20% equity outside the first-mortgage balance.
Does an FHA Cash-Out Refinance Require Mortgage Insurance?
Yes. FHA generally charges an upfront mortgage insurance premium of 1.75% of the base loan amount and an annual mortgage insurance premium. For terms longer than 15 years and an original LTV of 90% or less, annual MIP generally lasts 11 years.
Does a Conventional Cash-Out Refinance Require PMI?
A conforming conventional cash-out refinance on a one-unit primary residence generally does not require PMI because the standard maximum LTV is 80%.
How Long Must You Own a Home Before an FHA Cash-Out Refinance?
FHA generally requires the borrower to have owned and occupied the property as a principal residence for the preceding 12 months. Limited exceptions can apply.
How Long Must You Own a Home Before a Conventional Cash-Out Refinance?
Fannie Mae and Freddie Mac generally require at least one borrower to have been on title for six months. Delayed-financing and other stated exceptions can permit an earlier transaction.
Can You Refinance a Conventional Loan Into an FHA Cash-Out Loan?
Yes. The existing mortgage does not generally need to be FHA-insured. The new loan must satisfy FHA cash-out refinance requirements.
Can You Refinance an FHA Loan Into a Conventional Cash-Out Loan?
Yes, when the borrower and property satisfy conventional cash-out requirements. The new loan pays off the FHA mortgage, including the amount required to satisfy the existing balance.
What Can Cash-Out Refinance Proceeds Be Used For?
Borrowers commonly use cash-out proceeds for home improvements, debt repayment, education costs, emergency expenses or other permitted purposes. Lender requirements and applicable law can affect the transaction.
Is FHA or Conventional Cash-Out Refinancing Cheaper?
The lower-cost option depends on the interest rate, mortgage insurance, points, closing costs, loan term and how long you keep the mortgage. FHA mortgage insurance can increase costs, while conventional pricing can be less favorable for some credit profiles.
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