Freddie Mac Guidelines: No Cash-Out Refinance Mortgages

What Is a No Cash-Out Refinance

A no cash-out refinance lets you replace your current mortgage with a new one without taking significant cash from your home's equity. Think of it as swapping your old loan for a new one with better terms — lower rate, different payment schedule, or switching from adjustable to fixed rate.

The "no cash-out" label means you're not treating your home like an ATM. You can pocket a small amount (up to 1% of the loan or $2,000, whichever is greater), but the bulk of your new loan pays off the old mortgage and covers closing costs.

Say you owe $300,000 on your current mortgage and your home appraises for $400,000. In a no cash-out refinance, your new loan might be $305,000 — enough to pay off the $300,000 balance, cover $3,000 in closing costs, and give you $2,000 in cash (since 1% of $305,000 is $3,050, but you're limited to what you actually need).

What You Can Pay With Refinance Proceeds

The money from your new loan can pay off several specific debts and costs. Your existing first mortgage gets paid off regardless of when you got it, as long as it was used to buy the property originally or was a refinance at least 30 days old.

You can pay closing costs for the new loan — appraisal, title insurance, origination fees, and other standard refinance expenses. Late fees or prepayment penalties on your current mortgage also qualify.

Junior liens like second mortgages or home equity lines can be paid off, but only if the entire amount of those loans went toward buying your current home. If you took a second mortgage to buy the house and later drew additional money for other purposes, you'll need documentation showing the original loan amount used for the purchase.

Property taxes present a wrinkle. You cannot use refinance proceeds to pay past-due property taxes unless you're taking the maximum cash out allowed. If you owe $5,000 in back taxes, you'd need to pay those separately before closing or take your full cash-out allowance to cover them.

Required Documentation

Your lender needs proof that any debts you're paying off meet Fannie Mae's requirements. For your existing first mortgage, the payoff statement and credit report showing the loan's origination date usually suffice.

If you're paying off junior liens, you'll need the original loan documents proving the money went entirely toward purchasing the property. A settlement statement from your home purchase showing the second mortgage funding is ideal documentation.

For land contracts or contracts for deed, you need the executed contract, proof of 12 months of payments, and evidence the contract is at least 12 months old. Bank statements, canceled checks, or payment receipts work for payment history.

PACE liens (Property Assessed Clean Energy financing) require additional documentation per [[Section 4301.8]], including verification that the improvements were completed and meet program requirements.

Why These Rules Exist

Fannie Mae restricts cash-out amounts because no cash-out refinances carry lower risk than cash-out transactions. When borrowers extract significant equity, they have less skin in the game and higher incentive to walk away if home values drop.

The 30-day seasoning requirement for previous refinances prevents rapid-fire refinancing that could indicate fraud or predatory lending. It ensures borrowers aren't churning loans to generate fees without meaningful benefit.

The restriction on junior lien payoffs protects against inflated property values. If someone took a second mortgage for home improvements after purchase, paying it off with refinance proceeds could effectively allow cash out beyond the stated limits.

Common Problems and Complications

The biggest trap involves junior liens that weren't used entirely for the home purchase. Say you bought your house with a first mortgage and a $50,000 second mortgage, then later drew an additional $20,000 from the second mortgage for other expenses. You can only pay off the original $50,000 portion with your no cash-out refinance proceeds.

Timing issues arise with recent refinances. If you refinanced six months ago and want to refinance again, that's fine. But if you refinanced 20 days ago, you'll need to wait until the 30-day mark passes.

Excess proceeds create complications many borrowers don't expect. If your loan amount exceeds what you need to pay off debts and closing costs, you cannot pocket the difference beyond the cash-out limits. The extra money must either reduce your loan amount or be applied as a principal payment at closing.

Property tax delinquencies can derail transactions. If you owe $3,000 in back taxes and only qualify for $2,000 in cash out, you'll need to bring money to closing or pay the taxes before the refinance.

Special Program Variations

Refi Possible mortgages have additional restrictions on proceeds usage per [[Section 4302.5]]. These loans target borrowers with limited equity, so the allowable uses are more restrictive than standard no cash-out refinances.

CHOICERenovation and GreenCHOICE mortgages allow proceeds to fund specific home improvements in addition to paying off existing debt. The renovation costs must meet program requirements and be completed according to Fannie Mae guidelines.

Construction-to-permanent and renovation mortgages follow different rules entirely under [[Chapter 4602]], allowing proceeds to fund construction or improvement costs beyond the standard no cash-out parameters.

References

For the official guidelines, see 4301.4: "No cash-out" refinance Mortgages in the Fannie Mae Selling Guide.