Cash-Out Refinance Rules Are Changing

February 23rd, 2023

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Both Fannie Mae and Freddie Mac changed their seasoning requirements for cash-out refinances. They are now requiring 12 months seasoning for cash-out refinances when paying off an existing mortgage. What does this mean?

Cash out refinance when paying off an existing mortgage

It relates to paying off an existing mortgage and getting cash out on top of paying off the existing mortgage. Now the borrower must wait 12 months before being able to do so.

An example would be when you buy a new home and have a large down payment. Then you quickly decide to get cash out and tap the equity, for example to do home renovations. You need to wait one year to do this. But if you have already lived in a home for one year, then you can get a cash out without waiting. This is so because in this scenario you have already seasoned the existing mortgage for one year.

The 12 months is measured from the note date of the existing loan to the note date of the new loan. The note date is usually dated as of the closing date.

Cash out refinance when you own a home with no existing mortgage

This seasoning rule is different if you pay cash for a home and plan to get a mortgage on it later. In this scenario you’ll only need to wait 6 months to get that mortgage. When you get a mortgage on a home that is owned free and clear, it’s still considered “cash out”. Hence, the mortgage would be labeled a Cash-Out Refinance.

An example would be if you plan to be aggressive and beat out the competition by paying cash for a new home. And then you assume you can quickly place a new mortgage on it right after closing. So your original intention was to have a mortgage. In this case you’ll have to wait 6 months to do that.

Waiting 6 months to get a new mortgage means you’ll be assuming interest-rate, risk. Rate risk means you’ll be subject to whatever the rates do while you’re waiting.

This is not a change in rules. This 6 month waiting period is an existing requirement. It states at least one borrower be on title to the property for at least six months prior to the new loan.

Are there exceptions to the 6 month waiting period?

But there are exceptions permitted:

  • There is no waiting period if the lender documents that the property was acquired through an inheritance. Being legally awarded the property would also be an exception. This would be through divorce, separation, or dissolution of a domestic partnership.
  • If the delayed financing requirements are met. See Delayed Financing Exception below*.

Delayed financing rules

*For borrowers seeking delayed financing:

  • The Closing Disclosure must show no financing secured by the property was used to purchase the property.
  • The preliminary title report must reflect the Borrower as the owner of the property. It also must reflect that there are no liens on the property.
  • The source of funds used to purchase the subject property must be fully documented.
  • If funds were borrowed to purchase the subject property:
    • Cash-out proceeds must be used to pay off or pay down the borrowed funds.
    • Additional cash-out is permitted only when all borrowed funds are paid in full.
    • The payment on any outstanding balance of the borrowed funds must be in the debt-to-income ratio.
  • The refinance loan must not exceed the sum of the original purchase price and Closing Costs, less any gift funds used.
  • There must have been no relationship between the buyer and seller of the purchase transaction.

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Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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