What Is a Cash-Out Refinance
A cash-out refinance lets you replace your existing mortgage with a new, larger loan and pocket the difference in cash. You can also do a cash-out refinance on a property you own free and clear.
Say you owe $200,000 on your home worth $400,000. You could refinance into a $300,000 loan, pay off the existing $200,000 mortgage, and receive $100,000 in cash (minus closing costs). The key difference from a rate-and-term refinance is that you're taking money out of your home's equity.
Fannie Mae treats cash-out refinances differently from regular refinances. They carry higher interest rates, stricter qualification requirements, and additional loan-level price adjustments.
The 6-Month Ownership Rule
At least one borrower must have been on title for six months before the new loan closes. This prevents people from flipping properties quickly using cash-out refinances.
The clock starts ticking from when you took title, not when you applied for the loan. If you bought your home on January 15th, you cannot close a cash-out refinance until July 15th at the earliest.
Several exceptions exist to this rule:
- You inherited the property
- You received the property through divorce or legal separation
- You qualify for the delayed financing exception
- You owned the property through an LLC or trust that you controlled
The LLC exception requires that you owned or controlled the majority of the company. When you close the refinance, you must transfer ownership from the LLC to your personal name.
The 12-Month Mortgage Seasoning Requirement
If you have an existing first mortgage, it must be at least 12 months old before you can pay it off with a cash-out refinance. This rule measures from the note date of your current loan to the note date of the new loan.
This requirement only applies to first mortgages. You can pay off second mortgages, HELOCs, or other subordinate liens of any age through a cash-out refinance.
The 12-month rule has two exceptions. It does not apply when you're buying out a co-owner through a legal agreement, such as a divorce settlement. It also does not apply to subordinate liens being paid off.
The Delayed Financing Exception
This exception lets you do a cash-out refinance within six months of purchase if you bought the property with all cash. Think of it as delayed financing for a cash purchase.
Say you bought a $300,000 house with cash in March using funds from selling your previous home. In May, you could do a cash-out refinance to pull some of that cash back out, even though you have not owned the property for six months.
The delayed financing exception has strict requirements:
- The original purchase was an arm's length transaction
- You have a settlement statement proving no mortgage financing was used
- You can document the source of your cash (bank statements, loan documents)
- The new loan amount cannot exceed your actual cash investment plus closing costs
If you used an unsecured loan or HELOC on another property to buy the house, you must use the cash-out proceeds to pay off or pay down that debt. Any remaining balance gets included in your debt-to-income ratio calculation.
Reserve Requirements for High DTI Ratios
Desktop Underwriter (DU) loans with debt-to-income ratios above 45% require six months of mortgage payment reserves. This applies only to DU loans, not manually underwritten ones.
Reserves must equal six months of your new mortgage payment, including principal, interest, taxes, insurance, and any HOA dues. You can use savings accounts, checking accounts, investment accounts, or retirement accounts to meet this requirement.
The reserve requirement reflects the higher risk that Fannie Mae sees in cash-out refinances, especially when borrowers carry significant debt loads.
Student Loan Cash-Out Refinances
Fannie Mae offers a special program that waives the cash-out refinance pricing adjustment if you use the proceeds primarily to pay off student loans. This can save you money on your interest rate.
To qualify, you must pay off at least one student loan with the refinance proceeds. The student loan must be in your name, your spouse's name, or your dependent child's name. Parent PLUS loans count if they were used for your dependent child's education.
You can also pay off your existing mortgage, subordinate liens used to purchase the property, and PACE loans for energy improvements. However, you cannot pay off other types of debt like credit cards or personal loans.
The program limits cash back to the greater of 1% of the loan amount or $2,000. If you're refinancing a $400,000 loan, you could receive up to $4,000 in cash back after paying off the student loans and other eligible debts.
What Documents You Need
Your lender will require standard refinance documentation plus additional items specific to cash-out transactions:
- Property deed showing when you took title
- Existing mortgage statements and payment history
- Settlement statement from your original purchase (for delayed financing)
- Bank statements showing source of funds (for delayed financing)
- Student loan statements and payment history (for student loan cash-out)
- Documentation of any subordinate liens being paid off
For delayed financing exceptions, you need particularly thorough documentation. The lender must verify that you used no mortgage financing in the original purchase and can trace the source of your cash.
Student loan cash-out refinances require current student loan statements showing balances and payment status. The lender needs to verify that the loans are in eligible names and that you're using sufficient proceeds to pay them off.
Common Problems and Gotchas
The property listing restriction catches many borrowers off guard. If your home is currently listed for sale, you must take it off the market before closing the cash-out refinance. You cannot close while the property is actively marketed.
Timing calculations can be tricky. The 6-month ownership period and 12-month mortgage seasoning run on different clocks. You might own the property long enough but still need to wait for your mortgage to season, or vice versa.
Delinquent property taxes create complications. If your taxes are more than 60 days past due, you can include them in the loan amount, but you must establish an escrow account unless state law prohibits it.
The delayed financing exception requires perfect documentation. Missing bank statements or unclear fund sources can disqualify the transaction. Many lenders avoid these deals because of the documentation burden.
Student loan cash-out refinances have narrow eligibility rules. The student loans must be in specific names, and you cannot use proceeds for other debt payoff. Many borrowers assume they can pay off credit cards or car loans, but the program does not allow this.
Why These Rules Exist
Fannie Mae's restrictions reflect the higher risk profile of cash-out refinances compared to rate-and-term refinances. When borrowers extract equity, they increase their loan balance and reduce their financial cushion.
The ownership and seasoning requirements prevent rapid property flipping and ensure borrowers have a genuine long-term interest in the property. They also give lenders time to verify that the original purchase price was legitimate.
The reserve requirement for high DTI ratios acknowledges that borrowers taking cash out while carrying significant debt pose elevated default risk. The six-month reserve provides a safety net.
Student loan cash-out refinances receive favorable treatment because Fannie Mae views student loan debt as "good debt" that improves borrowers' long-term earning potential. The program encourages borrowers to consolidate high-rate student loans into lower-rate mortgage debt.
References
For the official guidelines, see B2-1.3-03: Cash-Out Refinance Transactions in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
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Original Fannie Mae Guideline Text
B2-1.3-03, Cash-Out Refinance Transactions (12/10/2025)
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.
See Cash-Out Refinance Transactions in
for additional information.
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 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 for additional information.
Transactions classified as HomeStyle Refresh. However, 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
.
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
. The borrower(s) may have initially purchased the property as one of the following:
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.
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
At least one student loan must be paid off with proceeds from the subject transaction with the following criteria:
The transaction may also be used to pay off one of the following:
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
and 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 does not exceed the greater of 1% 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
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.
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