To date, Fannie Mae required a minimum of six (6) months to elapse between the time a borrower purchases a home and subsequently applies for a cash-out refinance. Fannie Mae now allows a cash-out refinance within six (6) months of a purchase transaction when no financing was obtained for the purchase transaction under the following parameters:
(1.) The new loan amount is not more than the actual documented amount of the borrower’s initial investment in purchasing the property, plus the financing of closing costs, prepaid fees, and points (subject to the maximum LTV, CLTV, and HCLTV ratios for the transaction).
(2.) The purchase transaction was an arms-length transaction.
(3.) The purchase transaction is documented by the HUD-1, which confirms that no mortgage financing was used to obtain the subject property. The preliminary title search or report must also confirm no liens on the subject property.
(4.) The source of funds for the purchase transaction can be documented (bank statements, personal loan documents, HELOC on another property). Any loans used as the source for the purchase transaction will be required to be repaid on the new HUD-1.
(5.) All other cash-out refinance eligibility requirements are met.
This can be great news for someone that recently purchased a new home using all cash to close instead of financing the original purchase with a mortgage. There are many reasons why someone may have purchased using all cash as opposed to mortgage financing.
One reason may have been to quickly secure a property that had multiple offers. The “all-cash” purchase transaction is a stronger transaction than one that requires mortgage financing. The buyer may not have wanted to risk losing a great property to a buyer that wanted to purchase the same home utilizing a mortgage and decided to pay cash in order to close quickly.
Now that Fannie Mae has changed the cash out refinance requirements, this allows the cash buyer to recover their funds sooner than later, if they so choose.
If you choose to purchase using all cash and later decide that you need your liquidity returned by utilizing a cash out refinance, be sure to check with your CPA regarding the tax implications.
The rules around mortgage interest deductions are complex. There is a difference between acquisition indebtedness and home equity indebtedness. Acquistion indebtedness offers the most favorable tax advantage. As always, if you have any questions about how you should handle your specific tax situation as it relates to your purchase and what is best, get professional tax advice.
For additional mortgage advice in the ever changing world of mortgage financing, please call the offices of Fairway Independent Mortgage (Houston) for all your purchase and refinance mortgage needs at (713) 528-0333.