Are a Texas ‘cash-out’ and a Fannie Mae ‘cash-out’ different?

In a word, yes. The same phrase (‘cash-out’) has separate and sometimes contradictory meanings and restrictions between Fannie Mae requirements and Texas law, which can cause continuing confusion among lenders.

Under Texas law, if the property is the borrower’s homestead, a loan that gives the borrower even a penny of equity, either in cash or paying off a debt that wasn’t a valid lien on the property, is considered ‘cash-out,’ and has to meet the Texas requirements for a home equity loan. A refinance loan on homestead property, if it does not meet the (f)(2) ‘rate-and-term’ refinance requirements, must be documented as a Texas home equity loan.

Fannie Mae, on the other hand, categorizes refinance loans in all states as either ‘limited cash-out refinance’ or ‘cash-out refinance.’ A Fannie ‘limited cash-out’ refinance may pay off an existing first lien and subordinate liens, but only if the subordinate liens were used to purchase the property, and the loan may also give the borrower a small amount of cash-out. Fannie Mae Selling Guide, B2-1.3-02, Limited Cash-Out Refinance Transactions (06/03/2020)

A Fannie ‘cash-out’ refinance would allow payoff of junior liens filed after purchase, or a loan where there were no prior liens on the property. A Fannie Mae ‘cash-out’ refinance also includes a six-month ‘seasoning’ requirement, meaning that the borrower must hold title for at least six months before the disbursement date of the refinance loan. Fannie Mae Selling Guide, B2-1.3-03, Cash-Out Refinance Transactions (10/07/2020)

There are a few cases where the two definitions do not fit well together. For example, a refinance of a Texas homestead that includes the payoff of a junior lien filed after purchase of the property is considered a Fannie Mae ‘cash-out,’ but is not a Texas ‘cash-out.’ Fannie Mae has the six-month seasoning requirement after purchase for its ‘cash-out’ refinance, but Texas has no such requirement between purchase of the property and closing a home equity loan, assuming the other Texas home equity requirements are met. A Texas home equity loan can be closed using a power of attorney, as long as it is signed at the offices of an attorney, title company or lender. Fannie Mae does not allow a Fannie ‘cash-out’ loan to be closed by power of attorney. Fannie Mae Selling Guide, B8-5-05, Requirements for Use of a Power of Attorney (03/03/2021)

In this blog post concerning legal and regulatory matters of interest to the mortgage industry, Sandler Law Group (SLG) provides general information and industry observations that are not motivated by or concerned with a particular past occurrence or event, or a specific existing legal problem of which SLG is aware. Nothing published herein is intended to constitute legal advice and the use of the blog post by a reader shall not give rise to an attorney-client relationship with SLG. SLG expressly disclaims any representation of accuracy or reliability as to the content of this blog post, as well as any obligation to maintain such content over time or to ensure it is free from errors. Brad Cope is the attorney responsible for the SLG content of this blog post. Unless otherwise noted, the attorneys of SLG are not certified by the Texas Board of Legal Specialization.