Taking money out of your own home when refinancing is possible. Popular cash-out refinance programs are offered by Fannie Mae, Freddie Mac, the Federal Housing Administration, and the Department of Veterans Affairs. Take a look at each cash-out refinance offering and find out which one is for you.
Conventional Cash-out Refinance Programs
- Property and Purposes. Fannie Mae allows cash-out refinances on principal residences (1 to 4 units), second homes, and investment properties. The property must be owned or acquired by the borrower six months before applying for a cash-out loan. It may be exempted if delayed financing is met. Cash-out proceeds can be used for a variety of purposes, including payoff of the first mortgage plus subordinate liens and financing of the closing costs.
- LTV and CLTV. For properties that were listed within six months of the cash-out transaction, whichever is lower of (a) 70% of the loan-to-value, combined loan-to-value and high combined loan-to-value ratios or (b) maximum ratios allowed.
- Credit and Income. Credit score requirements, in addition to LTV, will determine the loan-level price adjustments applicable to cash-out refinances.
- Standout Features. Fannie Mae’s delayed financing allows borrowers to obtain mortgage months after buying the home in cash.
- Property and Purposes. Applicable to one- to four-unit principal residences, second homes, and investment units. A Freddie Mac cash-out loan can be used to consolidate debts and more.
- LTV and CLTV. In Freddie Mac’s case, maximum loan-to-value, total loan-to-value (TLTV) and high total loan-to-value ratios will apply. Specifically, 80% for one-unit primary residence; 75% for two-to-four-unit primary residences, second homes and one-unit investment properties; and 70% for 2- to 4-unit investment properties.
- Credit and Income. A minimum credit score of 620, but you must own the property or be on the title securing the property at least six months before the cash-out transaction.
- Standout Features. Closing costs can be rolled into the new cash-out loan.
Government Cash-out Refinance Programs
- Property and Purposes. Cash-out refinances are applicable to owner-occupied one-to-four unit homes. Cash can be taken out for any purpose. To qualify, your home must be backed with a 12-month mortgage payment record of no late payments. No seasoning period is required for subordinate liens.
- LTV and CLTV. You can borrow up to 85% of the appraised value of your home. Acceptable combined loan-to-value ratio is also up to 85%.
- Credit and Income. A standard credit score of 580 applies although FHA-approved lenders could require a credit score of at least 640. The resulting monthly payment must be within acceptable debt-to-income levels.
- Standout Features. You will be required to pay a mortgage insurance which appears two ways: (a) an upfront mortgage insurance premium, and (b) a monthly mortgage insurance premium that is basically an annual fee paid in 12 monthly installments. The monthly insurance component may be removed if the mortgage reaches 78% LTV.
- Property and Purposes. The VA guarantees cash-out refinances on primary residences. Cash can be taken out for debt consolidation, school funding, home improvements, and any other purposes.
- LTV and CLTV. A VA cash-out loan can be 100% of the property’s appraised value but lenders often cap the maximum loan amount to 90% of the home value.
- Credit and Income. While there is no prevailing minimum credit score, VA-approved lenders may require a credit score of 620. The borrower must show proof of income to the lender in the form of W2s and federal income tax returns.
- Standout Features. Mortgage insurance is not required on VA cash-out loans. And sellers may be allowed to pay the closing costs. Nevertheless, you are required to pay a funding fee whenever you take out a VA loan. This can go up to 3.15% of your total loan amount.
The U.S. Department of Agriculture, through the Rural Housing Agency, offers three types of refinancing: streamlined refinance, non-streamlined refinance, and streamlined-assist refinance. However, no cash-out refinance under USDA loans is available.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.