2. Cash Out Refinance Transactions

Introduction

This topic contains general information for “cash-out” refinance transactions, including

•	cash out refinance transaction percent limits, and

•	cash out refinancing risk.

Change Date

May 10, 2009

4155.1 3.B.2.a General Information for Cash Out Refinance Transactions

Cash out refinance transactions are only permitted on owner occupied principal residences. Properties owned free and clear may be refinanced as cash out transactions.

Subordinate financing may remain in place, but subordinate to the FHA insured first mortgage, regardless of the total indebtedness or combined LTV, provided that the borrower qualifies for making scheduled payments on all liens.

Non-occupant coborrowers may not be added in a cash out refinance transaction in order to meet FHA's credit underwriting guidelines for the mortgage. Any coborrower or cosigner being added to the Note must be an occupant of the property.

If the property was acquired less than 12 months preceding the loan application, the mortgage amount must be calculated using the lesser of the appraised value or the original sales price.

4155.1 3.B.2.b Cash Out Refinance Transaction Percentage Limitations

The table below describes the percentage limitations for cash out refinance transactions.

The cash out refinance transaction is limited to …	When …
85 percent of the appraised value	•	the property has been owned by the borrower as his/her principal residence for at least 12 months preceding the date of the loan application, or
	•	the property is encumbered by a mortgage, and the borrower has failed to make all mortgage payments within the month due for the previous 12 months (such as one or more payments are made more than 30 days late)
	Note: If the property has been owned by the borrower for less than 12 months, the mortgage amount must be calculated using the lesser of the appraised value or the original sales price multiplied by 85 percent.
95 percent of the appraised value	•	the property has been owned by the borrower as his/her principal residence for at least 12 months preceding the date of the loan application
	•	the property is encumbered with a mortgage, the borrower has made all mortgage payments within the month due for the previous 12 months (no payments have been made more than 30 days late) and is current for month due, and
	•	property has less than three dwelling units

4155.1 3.B.2.c Cash Out Refinancing Risk

Cash out refinancing for debt consolidation represents considerable risk, especially if the borrowers have not had a corresponding increase in income.

Careful evaluation of this type of transaction is required.