Fannie Mae Selling Guide B2-1.3-02 — Limited Cash-Out Refinance Transactions

Fannie Mae Selling Guide B2-1.3-02 — Limited Cash-Out Refinance Transactions

B2-1.3-02, Limited Cash-Out Refinance Transactions (10/08/2025) Introduction This topic contains information on limited cash-out refinance transactions, including: Eligibility Requirements Additional Requirements for Limited Cash–Out Refinance Transactions with LTV, CLTV, or HCLTV Ratios of 95.01 – 97% Ineligible Transactions Acceptable Uses Cash Back 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 B2-2-01, General Borrower Eligibility Requirements 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. Published May 6, 2026 175 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 Refresh for Improvements on Existing Properties, 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. Criteria Requirements 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 • the lender’s servicing system, • the current servicer (if the lender is not the servicer), • Fannie Mae’s Loan Lookup tool, or • any other source as confirmed by the lender. Note: This requirement does not apply if the CLTV exceeds 95% only due to a Community Seconds loan. LTV, CLTV, or HCLTV Ratio 95.01 to 97% Note: The CLTV ratio can be up to 105% if the subordinate lien is a Community Seconds loan. Loan Type Fixed-rate loans with terms up to 30 years. Note: High-balance and ARM loans are not permitted. Published May 6, 2026 176 Criteria Requirements 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. Underwriting Method DU only 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 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. See also B2-1.3-04, Prohibited Refinancing Practices. 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, Published May 6, 2026 177 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 B5-7-01, High LTV Refinance Loan and Borrower Eligibility. Note: These refunds may also be applied as a principal balance curtailment in accordance with B2-1.5-05, Principal Curtailments. 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; Published May 6, 2026 178 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 Refresh 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. 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. Recent Related Announcements Published May 6, 2026 179 The table below provides references to recently issued Announcements that are related to this topic. Announcements Issue Date Announcement SEL-2025-08 October 08, 2025 Announcement SEL-2025-04 June 04, 2025 Announcement SEL-2025-02 April 02, 2025 Announcement SEL-2024-08 December 11, 2024 Announcement SEL-2023-06 July 05, 2023 Announcement SEL-2023-05 June 07, 2023 Announcement SEL-2022-05 June 01, 2022 Announcement SEL-2020-03 June 03, 2020 Announcement SEL-2019-07 August 07, 2019

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