Freddie Mac Guidelines: Cash-Out Refinance Mortgages

What Is a Cash-Out Refinance

A cash-out refinance lets you replace your current mortgage with a new, larger loan and pocket the difference in cash. Unlike a rate-and-term refinance where you simply change your interest rate or loan terms, a cash-out refinance gives you money to spend however you want.

Say you owe $200,000 on your home that's worth $400,000. You could refinance into a $300,000 mortgage, pay off your existing $200,000 loan, and walk away with $100,000 cash (minus closing costs). You can use that money for home improvements, debt consolidation, investment property purchases, or anything else.

The key difference from a home equity loan or HELOC is that you're replacing your first mortgage entirely, not adding a second loan on top of it.

Six-Month Ownership Requirement

Fannie Mae requires at least one borrower to have owned the property for six months before the new loan closes. This rule prevents quick flips and ensures you have a genuine ownership stake in the property.

The six-month clock starts ticking from when your name appears on the deed, not when you applied for financing or started the purchase process. If you bought your home in January and want to do a cash-out refinance, you'll need to wait until July to close the new loan.

For cooperative apartments, the six-month requirement applies to when you first held the cooperative shares. For leasehold properties, it's when you became the lessee on the ground lease.

Special Ownership Situations

If you hold title through an LLC or limited partnership, things get more complex. The time the property was owned by the LLC counts toward your six months, but only if you were the majority owner or had control of the entity since it acquired the property. You'll also need to transfer title from the LLC to your personal name by the time the new loan closes.

Two major exceptions exist to the six-month rule. If you inherited the property or received it through a legal award like a divorce settlement, you can refinance immediately. You'll need documentation like a will, court order, or final divorce decree.

The other exception is delayed financing. This applies when you bought a property with cash and want to get a mortgage within six months. You'll need to prove you used your own money for the purchase, show the property has no liens, and limit your new loan amount to what you originally paid plus closing costs.

Primary Residence Occupancy Rules

If the property is your primary residence, every borrower on the loan must actually live there. This isn't just a checkbox on the application - Fannie Mae takes occupancy fraud seriously.

You can't have your spouse live elsewhere while you occupy the home, or add a non-occupant co-borrower to help you qualify. Everyone signing the note must call this property home.

This rule doesn't apply to second homes or investment properties, where occupancy requirements are different or non-existent.

Seasoning Requirements for Existing Mortgages

When you're refinancing an existing first mortgage, that loan must be at least 12 months old. The 12-month period runs from the note date of your current mortgage to the note date of your new cash-out refinance.

Your lender will verify this seasoning requirement through your credit report or title commitment. If your current mortgage shows up as opened 11 months ago, you'll need to wait another month before proceeding.

Several exceptions bypass the 12-month seasoning rule. If you're refinancing a HELOC into a first mortgage, the seasoning requirement doesn't apply. Construction-to-permanent loans and renovation mortgages also get exemptions, as do loans used to convert manufactured homes to real property.

Free and Clear Properties

You can do a cash-out refinance even if you own your home outright with no existing mortgage. Fannie Mae treats any new mortgage on a previously debt-free property as a cash-out refinance, regardless of how you plan to use the money.

This makes sense from a risk perspective. You're converting home equity into cash and taking on monthly mortgage payments where none existed before. The lender views this as inherently riskier than a simple rate-and-term refinance.

Two renovation loan programs get special treatment here. CHOICERenovation mortgages and GreenCHOICE mortgages are considered "no cash-out" refinances when proceeds go only toward eligible improvements, even on free-and-clear properties.

Required Documentation

Your lender will need several key documents to verify compliance with these rules. For the ownership requirement, expect to provide a copy of your deed showing when you took title. If you're claiming an inheritance exception, bring the will, probate documents, or court orders.

For seasoning requirements, your credit report typically shows when your current mortgage originated. If that's unclear, your lender might request your original loan documents or a title commitment from your current mortgage.

Delayed financing cases require extensive documentation. You'll need your purchase settlement statement showing you paid cash, a preliminary title report confirming no liens exist, and complete documentation of your funding sources. If you borrowed money for the purchase, you'll need loan agreements and proof of how the cash-out proceeds will repay those debts.

Credit Fees and Costs

Fannie Mae charges additional credit fees on certain cash-out refinances based on your loan amount and loan-to-value ratio. These fees get passed through to borrowers as higher interest rates or upfront costs.

The fee structure is complex and changes periodically. Your lender will calculate any applicable fees during the application process and disclose them on your loan estimate. Higher loan amounts and higher LTV ratios generally trigger higher fees.

These credit fees reflect Fannie Mae's view that cash-out refinances carry more risk than rate-and-term refinances. When you extract equity from your home, you have less skin in the game if property values decline.

Common Complications

The six-month ownership requirement trips up many borrowers who want to access their equity quickly after purchase. If you bought with cash planning to get a mortgage later, make sure you understand the delayed financing rules and documentation requirements.

Title issues can also cause problems. If your name isn't clearly on the deed for the full six months, or if there are gaps in the chain of title, your lender may require additional documentation or legal opinions.

Borrowers with complex ownership structures often face delays. LLCs, trusts, and partnerships require extra scrutiny to verify who actually controls the property and for how long.

The 12-month seasoning requirement for existing mortgages catches some borrowers off guard, especially those who recently bought with financing and want to access additional equity. Rate-and-term refinances don't have this restriction, but any cash-out does.

References

For the official guidelines, see 4301.5: Cash-out refinance Mortgages in the Fannie Mae Selling Guide.