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B2-1.3-03, Cash-Out Refinance Transactions (02/01/2023)


This topic contains information on cash-out refinance transactions, including:

Eligibility Requirements

The following requirements apply to cash-out refinance transactions:

  • The transaction must be used to pay off existing mortgage loans by obtaining a new first mortgage secured by the same property, or be a new mortgage on a property that does not have a mortgage lien against it (the borrower owns the property free and clear at the time of refinance).

  • If an existing first mortgage is being paid off through the transaction, it must be at least 12 months old at the time of refinance, as measured by the note date of the existing loan to the note date of the new loan. This requirement does not apply

    • to any existing subordinate liens being paid off through the transaction, or

    • when buying out a co-owner pursuant to a legal agreement.

  • At least one borrower must have been on title for at least for six months prior to the disbursement date of the new loan. See Ownership of the Property below for exceptions.

  • For DU loan casefiles, if the DTI ratio exceeds 45%, six months reserves is required.

  • Properties that were listed for sale must have been taken off the market on or before the disbursement date of the new mortgage loan.

  • For the maximum allowable LTV, CLTV, and HCLTV ratios and credit score requirements for manually underwritten cash-out refinance loans, see the Eligibility Matrix .

Ownership of the Property

At least one borrower must have been on title to the subject property for at least six months prior to the disbursement date of the new loan, unless one of the following exceptions apply:

  • There is no waiting period if the lender documents that the borrower acquired the property through an inheritance or was legally awarded the property (divorce, separation, or dissolution of a domestic partnership).

  • The delayed financing requirements are met. See Delayed Financing Exception below.

  • If the property was owned prior to closing by a limited liability corporation (LLC) that is majority-owned or controlled by the borrower(s), the time it was held by the LLC may be counted towards meeting the borrower’s six-month ownership requirement. (In order to close the refinance transaction, ownership must be transferred out of the LLC and into the name of the individual borrower(s). See B2-2-01, General Borrower Eligibility Requirements for additional details.)

  • If the property was owned prior to closing by an inter vivos revocable trust, the time held by the trust may be counted towards meeting the borrower’s six-month ownership requirement if the borrower is the primary beneficiary of the trust.

The above ownership policy applies in addition to the requirement that an existing first mortgage being paid off through the refinance is at least 12 months old.

Ineligible Transactions

The following transaction types are not eligible as cash-out refinances:

  • The mortgage loan is subject to a temporary interest rate buydown.

  • For certain transactions on properties that have a Property Assessed Clean Energy (PACE) loan, borrowers who refinance the first mortgage loan and have sufficient equity to pay off the PACE loan but choose not to do so will be ineligible for a cash-out refinance. See B5-3.4-01, Property Assessed Clean Energy Loans for additional information.

  • Transactions classified as HomeStyle Energy loans. However, energy-related improvements are permitted.

  • Transactions in which a portion of the proceeds of the refinance is used to pay off the outstanding balance on an installment land contract, regardless of the date the installment land contract was executed.

  • The new loan amount includes the financing of real estate taxes that are more than 60 days delinquent and an escrow account is not established, unless requiring an escrow account is not permitted by 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 for sale to Fannie Mae without an escrow account.

See also  B2-1.3-04, Prohibited Refinancing Practices.

Acceptable Uses

The following are acceptable uses for cash-out refinance transactions:

  • paying off the UPB of the existing first mortgage (provided the existing first mortgage is at least 12 months old);

  • financing the payment of closing costs, points, and prepaid items. The borrower can include real estate taxes in the new loan amount. Delinquent real estate taxes (taxes past due by more than 60 days) can also be included in the new loan amount, but if they are, an escrow account must be established, subject to applicable law or regulation;

  • paying off any outstanding subordinate mortgage liens of any age;

  • taking equity out of the subject property that may be used for any purpose;

  • financing a short-term refinance mortgage loan that combines a first mortgage and a non-purchase-money subordinate mortgage into a new first mortgage.

Delayed Financing Exception

Borrowers who purchased the subject property within the past six months (measured from the date on which the property was purchased to the disbursement date of the new mortgage loan) are eligible for a cash-out refinance if all of the following requirements are met.

Requirements for a Delayed Financing Exception
  The original purchase transaction was an arms-length transaction.
  For this refinance transaction, the borrower(s) must meet Fannie Mae’s borrower eligibility requirements as described in B2-2-01, General Borrower Eligibility Requirements. The borrower(s) may have initially purchased the property as one of the following:
  • a natural person;

  • an eligible inter vivos revocable trust, when the borrower is both the individual establishing the trust and the beneficiary of the trust;

  • an eligible land trust when the borrower is the beneficiary of the land trust; or

  • an LLC or partnership in which the borrower(s) have an individual or joint ownership of 100%.

  The original purchase transaction is documented by a settlement statement, which confirms that no mortgage financing was used to obtain the subject property. (A recorded trustee's deed (or similar alternative) confirming the amount paid by the grantee to trustee may be substituted for a settlement statement if a settlement statement was not provided to the purchaser at time of sale.)

The preliminary title search or report must confirm that there are no existing liens on the subject property.


The sources of funds for the purchase transaction are documented (such as bank statements, personal loan documents, or a HELOC on another property).

  If the source of funds used to acquire the property was an unsecured loan or a loan secured by an asset other than the subject property (such as a HELOC secured by another property), the settlement statement for the refinance transaction must reflect that all cash-out proceeds be used to pay off or pay down, as applicable, the loan used to purchase the property. Any payments on the balance remaining from the original loan must be included in the debt-to-income ratio calculation for the refinance transaction.

Note: Funds received as gifts and used to purchase the property may not be reimbursed with proceeds of the new mortgage loan.


The new loan amount can be no more than the actual documented amount of the borrower's initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points on the new mortgage loan (subject to the maximum LTV, CLTV, and HCLTV ratios for the cash-out transaction based on the current appraised value).

  All other cash-out refinance eligibility requirements are met. Cash-out pricing is applicable.

Student Loan Cash-Out Refinances

The student loan cash-out refinance feature allows for the payoff of student loan debt through the refinance transaction with a waiver of the cash-out refinance LLPA if all of the following requirements are met:

Requirements for Student Loan Cash-out Refinances
  The loan must be underwritten in DU. DU cannot specifically identify these transactions, but will issue a message when it appears that only subject property liens and student loans are marked paid by closing. The message will remind lenders about certain requirements below; however, the lender must confirm the loan meets all of the requirements outside of DU.
  The standard cash-out refinance LTV, CLTV, and HCLTV ratios apply per the Eligibility Matrix .
  At least one student loan must be paid off with proceeds from the subject transaction with the following criteria:
  • proceeds must be paid directly to the student loan servicer at closing;

  • at least one borrower must be obligated on the student loan(s) being paid off, and

  • the student loan must be paid in full - partial payments are not permitted.

  The transaction may also be used to pay off one of the following:
  • an existing first mortgage loan (including an existing HELOC in first-lien position); or

  • a single-closing construction-to-permanent loan 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 PACE loan or other debt (secured or unsecured) that was used solely for energy improvements (see B5-3.4-01, Property Assessed Clean Energy Loans and B5-3.3-01, HomeStyle Energy for Improvements on Existing Properties for additional information).
  The transaction may be used to finance 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.
  The borrower may receive cash back in an amount that is not more than the lesser of 2% of the new refinance loan amount or $2,000. The lender may also refund the borrower for the overpayment of fees and charges due to federal or state laws or regulations, or apply a principal curtailment (see B2-1.3-02, Limited Cash-Out Refinance Transactions for additional information).
  Unless otherwise stated, all other standard cash-out refinance requirements apply.

Delivery Requirements

Loans qualified as student loan cash-out refinances must be delivered to Fannie Mae with Special Feature Code (SFC) 003 and SFC 841.

Loan-Level Price Adjustments

An LLPA applies to certain cash-out refinance transactions based on the LTV ratio and credit score. These LLPAs are in addition to any other price adjustments that are otherwise applicable to the particular transaction. See the Loan-Level Price Adjustment (LLPA) Matrix.

As noted above, the LLPA is waived for loans that meet the student loan cash-out refinance requirements.

Recent Related Announcements

The table below provides references to recently issued Announcements that are related to this topic.

Announcements Issue Date
Announcement SEL-2023-01 February 01, 2023
Announcement SEL-2020-06 October 07, 2020
Announcement SEL-2019-06 July 03, 2019


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