Limited cash-out refinance transactions must meet the following requirements:
The transaction is being used to pay off an existing first mortgage loan (including an existing HELOC in first-lien position) by obtaining a new first mortgage loan secured by the same property; or for single-closing construction-to-permanent loans to pay for construction costs to build the home, which may include paying off an existing lot lien.
Only subordinate liens used to purchase the property may be paid off and included in the new mortgage. Exceptions are allowed for paying off a Property Assessed Clean Energy (PACE) loan or other debt (secured or unsecured) that was used solely for energy improvements.
For a PACE loan originated prior to July 6, 2010, there is no limit on how much of the limited cash-out refinance loan amount may be used to pay off the PACE loan. See B5-3.4-01, Property Assessed Clean Energy Loans, for additional information.
For a PACE loan originated on or after July 6, 2010, or other debt used for energy improvements, the payoff amount included in the limited cash-out refinance is limited to 15% of the appraised value of the property. See B5-3.3-01, HomeStyle Energy for Energy Improvements on Existing Properties, for additional information.
The subject property must not be currently listed for sale. It must be taken off the market on or before the disbursement date of the new mortgage loan, and the borrowers must confirm their intent to occupy the subject property (for principal residence transactions).
If the LTV, CLTV, or HCLTV ratio exceeds 95% for a limited cash-out transaction, the following requirements apply.
|Existing Loan||The lender must document that the existing
loan being refinanced is owned (or securitized) by Fannie Mae. Documentation
may come from
The lender must inform DU that Fannie Mae owns the existing mortgage using the Owner of Existing Mortgage field in the online loan application before submitting the loan to DU.
Note: This requirement does not apply if the CLTV exceeds 95% only due to a Community Seconds loan.
|LTV, CLTV, or HCLTV Ratio||95.01 to 97%
Note: The CLTV ratio can be up to 105% if the subordinate lien is a Community Seconds loan.
|Loan Type||Fixed-rate loans with terms up to 30 years.
Note: High-balance, adjustable-rate, HomeStyle Energy mortgage loans, and HomeStyle Renovation mortgage loans are not permitted.
|Property and Occupancy||One-unit principal residence. All borrowers must occupy the property. Manufactured housing is not permitted.|
|Credit Score Requirements||At least one borrower on the loan must have a credit score.|
|Underwriting Method||DU only|
|Other||All other standard limited cash-out refinance policies apply.|
Note: The above requirements do not apply to DU Refi Plus, Refi Plus, or HomeReady loans. For additional information, see Section B5–5.2, DU Refi Plus and Refi Plus Mortgage Loans, and B5-6-02, HomeReady Mortgage Loan and Borrower Eligibility.
When the following conditions exist, the transaction is ineligible as a limited cash-out refinance and must be treated as a cash-out refinance:
no outstanding first lien on the subject property (except for single-closing construction-to-permanent transactions, which are eligible as a limited cash-out out refinance even though there is not an outstanding lien on the subject property);
the proceeds are used to pay off a subordinate lien that was not used to purchase the property (other than the exceptions for paying off PACE loans and other debt used for energy-related improvements, described above);
the borrower finances the payment of real estate taxes for the subject property in the loan amount, but does not establish an escrow account;
the borrower finances the payment of real estate taxes that are more than 60 days delinquent for the subject property in the loan amount; and
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 transaction is not eligible for delivery to Fannie Mae when the subject property is listed for sale at the time of disbursement of the new mortgage loan.
The following are acceptable in conjunction with a limited cash-out refinance transaction:
modifying the interest rate and/or term for existing mortgages;
paying off the unpaid principal balance of the existing first mortgage (including prepayment penalties);
for single-closing construction-to-permanent transactions, paying for construction costs to build a home, which may include paying off an existing lot lien;
financing the payment of closing costs, points, and prepaid items. With the exception of real estate taxes that are more than 60 days delinquent, the borrower can include real estate taxes in the new loan amount as long as an escrow account is established, subject to applicable law or regulation. (For example, if a particular state law does not allow a lender to require an escrow account under certain circumstances, the loan would be eligible as a limited cash-out refinance without an escrow account.) If an escrow account is not being established, see B2-1.2-03, Cash-Out Refinance Transactions;
receiving cash back in an amount that is not more than the lesser of 2% of the new refinance loan amount or $2,000;
buying out a co-owner pursuant to an agreement;
paying off a subordinate mortgage lien (including prepayment penalties) used to purchase the subject property. The lender must document that the entire amount of the subordinate financing was used to acquire the property; or
paying off the unpaid principal balance of PACE loans and other debt used for energy-related improvements, described above.
As noted above, the borrower may receive a small amount of cash back in a limited cash-out refinance transaction. The lender may also refund the borrower for the overpayment of fees and charges due to federal or state laws or regulations. Refunds such as these are not included in the maximum cash back limitation, provided that
the settlement statement clearly identifies the refund, and
the loan file includes documentation to support the amount and reason for the refund.
This applies to standard limited cash-out refinance transactions and DU Refi Plus and Refi Plus transactions.
Note: These refunds may also be applied as a principal balance curtailment in accordance with B2-1.4-05, Principal Curtailments.
To treat a transaction as a limited cash-out refinance transaction, the lender must document that all proceeds of the existing subordinate lien were used to fund part of the subject property purchase price or pay for permissible energy-related expenses. Written confirmation must be maintained in the mortgage file.
The following are acceptable forms of documentation:
a copy of the 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; or
for energy-related expenses, copies of invoices or receipts to evidence funds were used for energy improvements. A copy of an energy report is required in many cases. See B5-3.3-01, HomeStyle Energy for Energy Improvements on Existing Properties, for additional information.
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.
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 transaction.
Note: It is acceptable for borrowers to obtain cash from the proceeds of the new subordinate mortgage.
A transaction that requires one owner to buy out the interest of another owner (for example, 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 disbursement date of the new mortgage loan.
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 disbursement date of the new mortgage loan.
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.
Certain exceptions to the standard limited cash-out refinance requirements exist for DU Refi Plus and Refi Plus mortgage loans. These exceptions include:
the borrower is not permitted to pay off any existing subordinate liens with the proceeds from a new DU Refi Plus or Refi Plus transaction,
the borrower may only receive up to $250 cash back at closing,
the borrower is not required to establish an escrow account if real estate taxes (regardless of due date) for the subject property are financed in the loan amount of the DU Refi Plus or Refi Plus mortgage loan, and
the subject property may be listed for sale at the time of application or on the disbursement date. See B5-5.2-01, DU Refi Plus and Refi Plus Eligibility, and B5-5.2-02, DU Refi Plus and Refi Plus Underwriting Considerations for additional exceptions.
The table below provides references to the Announcements that have been issued that are related to this topic.
|Announcement SEL-2016–08||October 24, 2016|
|Announcement SEL-2016–07||August 30, 2016|
|Announcement SEL-2016–05||June 28, 2016|
|Announcement SEL-2016–03||March 29, 2016|
|Announcement SEL-2016–02||February 23, 2016|
|Announcement SEL-2015–10||September 29, 2015|
|Announcement SEL-2015–07||June 30, 2015|
|Announcement SEL-2015–03||March 31, 2015|
|Announcement SEL-2015–01||January 27, 2015|
|Announcement SEL-2014–13||November 10, 2014|
|Announcement SEL-2013–04||May 28, 2013|
|Announcement SEL-2013–01||January 17, 2013|
|Announcement SEL-2012–14||December 18, 2012|
|Announcement SEL-2012-13||November 13, 2012|
|Announcement SEL-2012–04||May 15, 2012|
|Announcement SEL-2012–01||January 31, 2012|
|Announcement SEL-2011–06||July 26, 2011|
|Announcement SEL-2010–16||December 1, 2010|
|Announcement SEL-2010–12||August 31, 2010|
|Announcement 09–32||October 30, 2009|
|Announcement 09-04||March 4, 2009|