What Is a Limited Cash-Out Refinance
A limited cash-out refinance lets you replace your existing mortgage with a new one while taking minimal cash out of your home's equity. Think of it as a rate-and-term refinance with a small cash allowance.
The main purpose is to pay off your current first mortgage, change your interest rate or loan term, and cover closing costs. You might also pay off subordinate liens that helped you buy the property originally.
Say you bought your home three years ago with a first mortgage of $400,000 and a second mortgage of $50,000. Today you want to refinance into a single loan at a lower rate. If that second mortgage was part of your original purchase financing, this qualifies as a limited cash-out refinance.
Who Can Apply
At least one borrower on the new loan must already own the property. You cannot use this program to refinance a property you just acquired, with specific exceptions.
The exceptions include inheriting the property, receiving it through divorce or legal separation, or being the beneficiary of a trust that previously owned the home. You can also qualify if you are financially responsible for the existing loan but not on title — common with LLC ownership structures.
If you are paying off an installment land contract, it must have been executed more than 12 months before your loan application date.
High Loan-to-Value Requirements
If your loan-to-value ratio exceeds 95%, additional restrictions apply. Your existing mortgage must be owned or securitized by Fannie Mae. The lender will check this through their Desktop Underwriter system.
These high-LTV loans are limited to fixed-rate mortgages with terms up to 30 years. The property must be a one-unit principal residence that you occupy. All borrowers must live in the home.
Manufactured housing is not permitted unless it meets MH Advantage requirements. The loan must be processed through Desktop Underwriter — manual underwriting is not allowed.
What You Can Pay Off
You can pay off your existing first mortgage, including any prepayment penalties, deferred balances from previous loan modifications, and late fees. Construction loans and documented cost overruns are also eligible.
Subordinate liens are trickier. You can only pay off second mortgages, home equity loans, or lines of credit that were used to purchase the property originally. The lender must verify this through your purchase settlement statement or title policy.
Property Assessed Clean Energy (PACE) loans and other debt used solely for energy improvements can be paid off even if they were not part of your original purchase financing. You will need invoices and receipts to document these energy-related expenses.
What Makes a Transaction Ineligible
Several situations disqualify you from limited cash-out treatment. If you own your home free and clear with no existing mortgage, you cannot use this program except for construction-to-permanent loans.
Paying off subordinate liens that were not used to purchase the property converts your transaction to a cash-out refinance. This includes home equity loans you took out years after buying the home for debt consolidation or home improvements.
If you owe more than 60 days of delinquent property taxes and want to finance them into the loan, the transaction becomes cash-out. You can finance current taxes or those less than 60 days past due.
Short-term refinances also trigger cash-out treatment. If you combined a first and second mortgage into one loan within the past six months, any new refinance of that combined loan is considered cash-out.
Cash Back Limits
You can receive cash back up to the greater of 1% of your new loan amount or $2,000. On a $500,000 refinance, you could get $5,000 back. On a $150,000 refinance, you are limited to $2,000.
This cash back can cover moving expenses, temporary housing costs, or other needs. It is separate from closing cost financing, which is unlimited in limited cash-out refinances.
Refunds for overpayment of fees due to federal or state regulations do not count toward the cash back limit. These must be clearly identified on your settlement statement with supporting documentation in your loan file.
Required Documentation
Your lender must document that any subordinate liens being paid off were used to purchase the property. The most common proof is your original purchase settlement statement showing the second mortgage.
A title policy from your purchase transaction that identifies subordinate financing also works. Other acceptable documentation includes loan documents or closing statements from your original purchase.
For PACE loans or energy-related debt, you need copies of invoices and receipts showing the funds were used for energy improvements. An energy report may also be required depending on the specific improvements made.
Property Listing Restrictions
If your property was previously listed for sale, it must be taken off the market by the time your new loan funds. You cannot complete a limited cash-out refinance on a property that is actively for sale.
This rule prevents borrowers from using refinance proceeds as a bridge to selling their home. The refinance must be for legitimate rate, term, or cash flow improvement purposes.
Buying Out Co-Owners
You can use a limited cash-out refinance to buy out a co-owner's interest in the property, typically in divorce situations. The property must have been jointly owned for at least 12 months before the new loan closes.
All parties must sign a written agreement detailing the property transfer terms and how the refinance proceeds will be distributed. The person keeping the property cannot receive any cash from the transaction — all proceeds go to the departing co-owner.
The remaining borrower must qualify for the new mortgage independently under Fannie Mae's standard underwriting guidelines. Recent inheritance cases are exempt from the 12-month joint ownership requirement.
Common Complications
Timing issues frequently arise with subordinate lien documentation. If you cannot locate your original purchase settlement statement, obtaining a copy from the title company or your real estate agent can take weeks.
Energy improvement documentation often lacks sufficient detail. Generic contractor invoices may not clearly show the work was energy-related. Detailed receipts and energy audit reports provide stronger documentation.
LLC ownership structures require careful handling. The property must be transferred into individual borrower names, and the borrowers must demonstrate they control the LLC that currently owns the property.
High-LTV transactions above 95% can be delayed if Desktop Underwriter cannot automatically verify that Fannie Mae owns your existing loan. Manual documentation of loan ownership adds processing time and complexity.
References
For the official guidelines, see B2-1.3-02: Limited Cash-Out Refinance Transactions in the Fannie Mae Selling Guide.
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Original Fannie Mae Guideline Text
B2-1.3-02, Limited Cash-Out Refinance Transactions (10/08/2025)
Eligibility Requirements
Additional Requirements for Limited Cash–Out Refinance Transactions with LTV, CLTV, or HCLTV Ratios of 95.01 – 97%
Documentation Requirements
Existing Subordinate Liens That Will Not Be Paid Off
New Subordinate Financing
Refinances to Buy Out An Owner’s Interest
Exceptions to Limited Cash-Out Refinance Requirements for High Loan-to-Value Refinance Loans
Eligibility Requirements
Limited cash-out refinance transactions must meet the following requirements:
The transaction is being used to obtain a new first mortgage secured by the same property to
pay off an existing first mortgage (including an existing HELOC in first-lien position);
pay off an existing construction loan and documented construction cost overruns that were incurred outside of the interim construction financing for two-closing construction-to-permanent loans. (These construction cost overruns must be paid directly to the builder at closing.);
pay for construction costs to build the home for single-closing construction-to-permanent loans, which may include paying off an existing lot lien; or
pay off an installment land contract that was executed more than 12 months before the date of the loan application.
At least one borrower on the new loan must be an owner (on title) of the subject property at the time of the initial application. Exceptions are allowed if the lender documents that
the borrower acquired the property through an inheritance or was legally awarded the property (such as through a divorce, separation, or dissolution of a domestic partnership); or
the property was previously owned by an inter vivos revocable trust and the borrower is the primary beneficiary of the trust;
the borrower is currently financially obligated on the loan being paid off but not on the title. This includes loans where the property is currently owned by a limited liability corporation (LLC) that is majority owned or controlled by the borrower(s). Ownership must be transferred into the name of the individual borrower(s). See for additional requirements; or
the borrower is paying off an installment land contract that was executed more than 12 months before the date of the loan application.
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-related improvements. See
, for additional information.
If the subject property was previously listed for sale, it must have been taken off the market on or before the disbursement date of the new loan.
Additional Requirements for Limited Cash–Out Refinance Transactions with LTV, CLTV, or HCLTV Ratios of 95.01 – 97%
If the LTV, CLTV, or HCLTV ratio exceeds 95% for a limited cash-out transaction, the following requirements also apply.
Existing Loan
The lender must inform DU that the existing loan is owned (or securitized) by Fannie Mae using the Owner of Existing Mortgage field in the online loan application before submitting the loan to DU.
The DU message indicating the borrower's existing loan was identified as a Fannie Mae loan may be relied upon as confirmation the loan is owned by Fannie Mae.
When DU is not able to identify the borrower's existing loan is owned (or securitized) by Fannie Mae, the lender must provide documentation. Documentation may come from
95.01 to 97%
Loan Type
Fixed-rate loans with terms up to 30 years.
Property and Occupancy
One-unit principal residence. All borrowers must occupy the property.
Manufactured housing is not permitted, unless the property meets the MH Advantage requirements.
Other
All other standard limited cash-out refinance policies apply.
Note: The above requirements do not apply to HomeReady or high LTV refinance loans. For additional information, see
or accordingly.
Ineligible Transactions
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 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.
See also
.
Acceptable Uses
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 existing first mortgage (which may include additional amounts required to pay off the loan, such as prepayment penalties, a deferred balance resulting from completion of a prior loss mitigation solution, and late fees);
paying for construction costs to build a home for a single-closing construction-to-permanent transaction, which may include paying off an existing lot lien;
paying off the construction loan and documented construction cost overruns for a two-closing construction-to-permanent loan;
paying off the installment land contract that was executed more than 12 months before the date of the loan application;
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 provided
the real estate taxes must be paid in full through the transaction, and
payment for the taxes must be disbursed to the taxing authority through the closing transaction, with no funds used for the taxes disbursed to the borrower;
providing cash back to the borrower (or any other party) in an amount that, in aggregate, does not exceed the greater of 1% 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. (When the subordinate loan is a Community Seconds, payoff may include any required payment of the share of appreciation due to the Community Seconds provider under the terms of the shared appreciation agreement.)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.
Cash Back
As noted above, the lender may provide 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. For high LTV refinance transactions, see
.
Note: These refunds may also be applied as a principal balance curtailment in accordance with
.
Documentation Requirements
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 , for additional information.
Existing Subordinate Liens That Will Not Be Paid Off
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.
New 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.
Refinances to Buy Out An Owner’s Interest
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.
Exceptions to Limited Cash-Out Refinance Requirements for High Loan-to-Value Refinance Loans
See Chapter B5-7: High Loan-to-Value Refinance Option, for modifications to the standard limited cash-out refinance requirements for high LTV loan transactions.
SEL-2019-07
