If the LTV, CLTV, or HCLTV ratio exceeds 95% for a limited cash-out transaction, the following requirements apply
Eligibility Requirements
The transaction is being used to pay off an existing first mortgage loan (including an existing HELOC in first-lien position) by obtaining a new first mortgage loan secured by the same property; or for single-closing construction-to-permanent loans to pay for construction costs to build the home, which may include paying off an existing lot lien.
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 B5-3.3-01, HomeStyle Energy for Improvements on Existing Properties, for additional information.
The subject property must not be currently listed for sale. It must be taken off the market on or before the disbursement date of the new mortgage loan, and the borrowers must confirm their intent to occupy the subject property (for principal residence transactions).
Requirements for Limited Cash–Out Refinance Transactions with LTV, CLTV, or HCLTV Ratios of – 97%
The lender must inform DU that Fannie Mae owns the existing mortgage using the Owner of Existing Mortgage field in the online loan application before submitting the loan to DU.
Note: The above requirements do not apply to HomeReady or high LTV refinance loans. For additional information, see B5-6-01, HomeReady Mortgage Loan and Borrower Eligibility or B5-7-01, High LTV Refinance Loan and Borrower Eligibility 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.
The transaction is not eligible for delivery to Fannie Mae when the subject property is listed for sale at the time of disbursement of the new mortgage loan.
Acceptable Uses
for single-closing construction-to-permanent transactions, paying for construction costs to build a home, which may include paying off an existing lot lien;
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 as;
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;
receiving cash back in an amount that is not more than the lesser of 2% of the new refinance loan amount or $2,000;
paying off a subordinate mortgage lien (including prepayment penalties) used to purchase the subject property. The lender must document that the entire amount of the subordinate financing was used to acquire the property; or
Cash Back to the Borrower
As noted above, the borrower ount 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
This applies to standard limited cash-out refinance transactions. For high LTV refinance transactions, see B5-7-01, High LTV Refinance Loan and Borrower Eligibility.
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.
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 B5-3.3-01, HomeStyle Energy for Improvements on Existing Properties, 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.
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.