Choosing Between a Conventional, FHA, and VA Cash-Out Refinance

With mortgage rates trending downwards, homeowners are taking advantage of the recent growth in property prices to refinance and cash out their built-up equity.

However, not all types of refinance loans are the same. You have options, namely conventional, FHA, and VA cash-out refinances.

Common Types of Cash-Out Refinances

The majority of home mortgages are conventional loans. These mortgages follow the lending guidelines set by Fannie Mae and Freddie Mac. But government-backed cash-out refinances, including those through the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA), also remain popular.

To better understand how each program differs, here are a few terms that you’ll need to be familiar with:

Debt-to-Income Ratio (DTI): Lenders calculate your debt-to-income ratio by totaling your monthly debt and dividing the sum by your monthly qualifying income. For example, if your monthly debt totaled $2,000 with a qualifying income of $5,000, your DTI would be 40%.

Loan-to-Value Ratio (LTV): A mortgage's loan-to-value ratio is the percentage of the property's value financed by debt. For example, if you applied for a $210,000 cash-out refinance on a home valued at $300,000, the LTV would be 70%.

Mortgage Insurance Premium (MIP): A mortgage insurance premium is assessed on all FHA loans, both at origination and on an ongoing annual basis.

Choosing a Conventional Cash-Out Refinance

Most borrowers opt for conventional cash-out refinances. Their guidelines can be stricter than with FHA or VA refinances. Still, they don't come with extra costs such as funding fees or MIP payments. Plus, they're the only of the three programs to offer cash-out refinances on second homes and investment properties.

Conventional Cash-Out Refinance Guidelines

Minimum Credit Score: 620

Max DTI: 45%, although you may be approved with a DTI as high as 50% if you have six months of mortgage payments in reserve

Acceptable Properties: Primary residences, second homes, and investment properties

Ownership Requirements: Your current mortgage must be 12 months old and you must have owned the property for at least six months (unless you qualify for delayed financing)

Max LTV: The amount of equity that you’re able to withdraw with a conventional cash-out refinance depends on the subject property:

Loan Limits: Conventional lenders follow conforming loan limits that are set annually by the Federal Housing Finance Agency. The 2024 conventional loan limits are:

*limits are higher in certain high-cost areas of the country where median home values exceed standard loan limits. This includes the entirety of Hawaii, Alaska, Guam, and the US Virgin Islands.

You can search for the conventional loan limits in your area with Fannie Mae’s Lookup Tool.

Pros & Cons of a Conventional Cash-Out Refinance

Conventional loans have more stringent lending criteria than government loans and may disqualify some prospective borrowers.

Pros:

• You can get a conventional cash-out refinance on your primary residence, second home, or investment property. FHA and VA loans are limited to your primary residence only

• Loan limits are higher for conventional refinances than FHA refinances in most areas

• No upfront or monthly mortgage insurance

• Rates are generally attractive for well-qualified borrowers

Cons:

• Borrowers with lower credit scores, considerable debt, or recent derogatory events may not qualify

• Interest rates can be higher than government-backed alternatives. However, they’re often competitive when MIP or the VA funding fee is accounted for

Choosing an FHA Cash-Out Refinance

The FHA offers government-backed cash-out refinances. Borrowers with lower credit scores may qualify for an FHA refinance more easily. But there are situations where someone with a moderate or even high credit score might want to consider an FHA cash-out refinance.

FHA Cash-Out Refinance Guidelines

Minimum Credit Score: 500, although some lenders may require a higher score

Max DTI: 50%

Acceptable Properties: Primary Residences

Ownership Requirements: You must have owned and occupied the home for at least 12 months

MIP Costs: FHA cash-out refinances come with an upfront MIP of 1.75% of your loan amount. This upfront fee can be paid at closing or wrapped into your mortgage and paid over time. You'll also pay an annual MIP equal to 0.5% of the borrowed amount

Max LTV: 80% of your property’s current market value

Loan Limits: FHA loan limits are relative to annual conforming limits and typically lower than conventional loan maximums. For most areas, the FHA limit is 65% of the maximum conforming loan. For high-cost areas, the FHA limit is 150% of the standard maximum loan. The 2024 FHA loan limits are:

The FHA has separate “exception area” limits for Hawaii, Alaska, Guam, and the US Virgin Islands. The maximum FHA loan limits for these areas are:

You can search for the FHA loan limits in your area with the FHA Mortgage Limits Lookup Tool.

Pros & Cons of an FHA Cash-Out Refinance

FHA cash-out refinances are great for borrowers with a low credit score or high DTI. However, well-qualified homeowners may go conventional to avoid paying MIP.

Pros:

• Borrowers with a credit score as low as 500 can qualify, although some lenders have higher requirements. If one FHA lender cannot qualify you based on your credit score, shop around for another company that can

• Homeowners with weak credit scores may be eligible for lower interest rates and fees than through conventional lenders

• If interest rates were to rise again, having an assumable FHA loan can be a selling point for your home

Cons:

• MIP is required on all FHA loans, regardless of your equity

• Only primary residences are eligible for an FHA cash-out refinance

• In most areas, the maximum loan amount is just 65% of the conventional loan limit

Choosing a VA Cash-Out Refinance

VA refinances are government-backed loans available to eligible service members, veterans, and their surviving spouses. VA loan interest rates are commonly among the lowest on the market. In many cases, homeowners can withdraw up to 100% of their property's value. A VA cash-out refinance is often the best choice for borrowers who qualify.

VA Cash-Out Refinance Guidelines

Minimum Credit Score: The VA sets no minimum credit score. However, expect to encounter lender-set minimums between 580 and 620

Max DTI: The VA sets no maximum DTI. However, expect to encounter lender-set maximums ranging from 41% to 50%

Acceptable Properties: Primary Residences

Ownership Requirements: Your current mortgage needs to be at least 210 days old

VA Funding Fee: VA cash-out refinances come with an upfront VA funding fee. In most cases, this is 3.3% of the loan amount. This fee is reduced to 2.15% for eligible borrowers who have never had a VA loan. This could apply to someone looking to refinance an existing conventional or FHA mortgage

Max LTV: 100% of your property’s current market value

Loan Limits: There are no set loan limits for VA borrowers who have full entitlement

Pros & Cons of a VA Cash-Out Refinance

For borrowers who qualify, the pros generally outweigh the cons of a VA cash-out refinance.

Pros:

• VA loan rates are among the lowest on the market

• There’s no maximum loan limit for borrowers with full entitlement

• VA refinances have a shorter waiting period after significant derogatory credit events, especially with extenuating circumstances

• You are able to cash out up to 100% of your home's built-up equity, although some lenders may cap that total at 90%. If you need to withdraw more than one lender will allow, shop around for other mortgage companies who can approve your refinance

Cons:

• You must have adequate service history and receive a VA Certificate of Eligibility (COE)

• Only primary residences are accepted – no cash-out refinances for second homes or investment properties

• Most borrowers encounter a VA funding fee of 3.3%. However, specific individuals with service-related injuries (or their surviving spouses) may be eligible to have the funding fee waived

Which Is the Best Cash-Out Refinance Option?

For most borrowers, conventional cash-out refinances are a popular option. However, VA loans may come with better rates for those who are eligible. On the other hand, FHA refinances could provide the best value for homeowners with lower credit scores or more debt.

Apply with an experienced mortgage lender to better understand how different cash-out refinance options might work for you.