In 2011 Fannie Mae eased it’s cash-out refinancing restrictions to allow home-buyers who purchase a home with all cash to replenish their funds with a “cash-out” refinance as soon as a day after closing on the original purchase.
Background: Prior to this home-buyers were not eligible to apply for a cash-out refinance inside the first 6 months of owning a home. This was often problematic for home-buyers who were in the position to buy a home using all cash because the IRS requires that “Acquisition Indebtedness“, which is basically the amount of mortgage for which a home-owner can deduct the interest on, be set up within the first 90 days of owning the home. Therefore, a home-buyer had to weigh the option of a) buying a home with cash and subsequently negotiating a better deal on the property versus b) taking out a mortgage so that they could deduct the interest and not positioning themselves as a cash-buyer.
Solution: In 2011, Fannie Mae tweaked the guidelines regarding cash-out refinance eligibility to allow home-owners who buy a home using all cash to conduct a cash-out refinance as soon as they own the home. There are a few details that home-buyers should take into consideration:
- The program is available on homes that are used for primary residence (up to 85% loan-to-value), second home (up to 75% loan-to-value), or investment property (up to 75% loan-to-value).
- The home purchase must have been an arms length transaction.
- The home purchase must have been made with all cash. NO MORTGAGE OR SELLER-CARRIED CONTRACT CAN SHOW UP ON THE FINAL HUD-1 SETTLEMENT STATEMENT.
- The underwriter will require that the applicant provide proof of purchase funds to make sure the applicant did not borrow the money from another source.
- Keep in mind that the new loan will be a “cash-out” refinance and not a “purchase” transaction so depending on the occupancy and loan-to-value the rates will likely be .125%-.375% higher.
Who can benefit?: Anyone who has enough liquid cash to buy a home with cash stands to benefit from this new flexibility. I believe this new provision is especially attractive for real estate investors who are in a position to buy property with cash. This allows them to negotiate the lowest possible price on a home, replenish their cash so that they can position themselves to buy another property, and get the benefit of deducting the mortgage interest against rental income.
Baby boomers who are close to retirement may also stand to benefit. Many have significant retirement nest eggs saved up and are viewing the current housing market as an opportunity to relocate into their dream home where they’ll spend their golden years.
Those interested in pursuing this program are encouraged to contact their mortgage professional BEFORE buying a home so they can be pre-approved for the cash-out refinance prior to closing.