This topic contains information on limited cash-out refinance transactions, including:
Limited cash-out refinance transactions must meet the following requirements:
The transaction is being used to pay off an existing first mortgage, including the payoff of a subordinate lien used to purchase the property by obtaining a new first mortgage secured by the same property.
- Continuity of obligation must be demonstrated (see B2-1.2-04, Continuity of Obligation).
- The subject property must not be currently listed for sale. It must be taken off the market on or before the application date, and the borrowers must confirm their intent to occupy the subject property (for principal residence transactions).
The following transactions are not eligible as limited cash-out refinances. These transactions must be treated as cash-out refinances.
- No continuity of obligation.
- No outstanding first lien on the subject property.
- The proceeds are used to pay off a subordinate lien that was not used to purchase the property.
- A short-term refinance mortgage loan that combines a first mortgage and a non-purchase money subordinate mortgage into a new first mortgage or any refinance of that loan within six months.
The following transaction types are not eligible for delivery to Fannie Mae:
- The subject property is currently listed for sale.
- The existing mortgage is a “restructured mortgage”.
The following are the acceptable uses for limited cash-out refinance transactions:
- Modifying the interest rate and/or term for existing mortgages.
- Paying off the unpaid principal balance of the existing first mortgage.
- Financing the payment of closing costs, prepaid items, and points.
- Receiving cash back in an amount that is not more than the lesser of 2% of the balance of the new refinance mortgage or $2000.
- Buying out a co-owner pursuant to an agreement.
- Paying off a subordinate mortgage lien used to purchase the subject property. The lender must document that the entire amount of the subordinate financing was used to acquire the property.
To treat a transaction as a limited cash-out refinance, the lender must document that all proceeds of the existing subordinate lien were used to fund part of the subject property purchase price.
Written confirmation must be maintained in the mortgage file.
The following are acceptable forms of documentation:
- A copy of the HUD-1 Settlement Statement for the purchase of the property.
- A copy of the title policy from the purchase transaction that identifies the subordinate financing.
- Other documentation from the purchase transaction that indicates that a subordinate lien was used to purchase the subject property.
Existing Subordinate Liens That Will Not Be Paid Off
When a new limited cash-out refinance transaction will not satisfy existing subordinate liens, the existing liens must be clearly subordinate to the new refinance mortgage. The refinance mortgage must meet Fannie Mae’s eligibility criteria for mortgages that are subject to subordinate financing.
New Subordinate Financing
When a borrower obtains new subordinate financing with the refinancing of a first mortgage loan, Fannie Mae treats the transaction as a limited cash-out refinance provided the first mortgage loan meets the eligibility criteria for a limited cash-out refinance.
Note: It is acceptable for borrowers to obtain cash from the proceeds of the new subordinate mortgage.
Refinances to Buy Out An Owner’s Interest
A transaction that requires one owner to buy out the interest of another owner (e.g., as a result of a divorce settlement or dissolution of a domestic partnership) is considered a limited cash-out refinance if the secured property was jointly owned for at least 12 months preceding the date of the mortgage application.
All parties must sign a written agreement that states the terms of the property transfer and the proposed disposition of the proceeds from the refinance transaction. Except in the case of recent inheritance of the subject property, documentation must be provided to indicate that the security property was jointly owned by all parties for at least 12 months preceding the date of the mortgage application.
Borrowers who acquire sole ownership of the property may not receive any of the proceeds from the refinancing.
The party buying out the other party’s interest must be able to qualify for the mortgage pursuant to Fannie Mae’s underwriting guidelines.