Freddie Mac vs Fannie Mae Cash-Out Refinance Guidelines

When people think of the real estate industry, they tend to think of one thing in particular – it’s complicated.

Most people don’t just pick up the phone and call a realtor anymore. There are digital middlemen in the real estate market, helping buyers search local listings and steering them to specific lenders. Such a homogenous approach would suggest that every transaction follows a similar pattern, and we all buy homes the same way and then faithfully pay down the mortgage.

The truth is, every agreement is different and every homebuyer has their own way of managing the debt burden associated with a home.  Many turn to government-backed loans if they’re unable to qualify for a loan another way.

The question is, what happens when it’s time to refinance a government-backed loan, especially if you’re looking to do a cash-out refi?

Here’s what you should know if you have a loan backed by Fannie Mae or Freddie Mac and you’re looking to cash out.

What is a Cash-Out Refinance?

Homeowners will often turn to the equity built up in their home when they need money.

One type of deal, specifically, will allow a homeowner to replace their existing mortgage with a new loan for more than they currently owe.  As Investopedia notes, the difference in those two amounts goes to the borrower in cash.

Let’s say that after years of monthly payments, you now owe $200,000 on your home mortgage. If the house is worth $350,000, you’ve built up approximately $150,000 in equity (which will increase as you pay down your principal, or if the property’s market value rises).

If you wanted $25,000 out of the cash-out refinance, your new loan would be for $225,000. Your new mortgage would marry the $200,000 balance that remained on the original loan and add on the $25,000 to be cashed out.

Cash-Out Refinance With Freddie Mac

The official line on The Federal Home Loan Mortgage Corporation, aka Freddie Mac, is that it’s a government-owned corporation and a cornerstone of the mortgage market. Its mission is not to make loans directly to homebuyers, but to purchase loans from lenders to replenish their funds. In turn, those lenders make loans to other borrowers.

According to the Home Buying Institute, Freddie Mac is one of the key players in the secondary mortgage market. As the name implies, the secondary market does not involve direct-to-consumer loans. Instead, the lending is structured in a way that makes loans more affordable to the average American. The country relies on Freddie Mac not only to support the nation’s homebuyers but renters as well.

Those with a government-backed loan from Freddie Mac not only have the option to refinance but to leverage home equity during a cash-out refinance.

Freddie Mac’s cash-out refinance option:

  • Allows the borrower to go through with a cash-out refinance as long as he or she has been on the title to the property for at least six months.
  • Allows a new mortgage to be structured for anyone with a minimum credit score of 620.
  • Allows all related closing and financing costs, as well as prepaid items, to be rolled into the new loan amount.
  • Allows borrowers with special circumstances to use cash obtained in a cash-out refinance to buy out the equity of a co-owner.

Cash-Out Refinance With Fannie Mae

The Federal National Mortgage Association, more commonly known as Fannie Mae, was established specifically to create a secondary market for the purchase and sale of mortgages.

This government-sponsored enterprise differs a bit from Freddie Mac, in that it buys its mortgages from different sources and has different qualifying guidelines.

Fannie Mae makes mortgages available primarily to less-qualified (low- and moderate-income) borrowers. In that sense, when it comes time to refinance – especially for those looking to take cash out on their home – there are different guidelines and a different system to adhere to.

Fannie Mae’s cash-out refinance option:

  • Allows qualification through a Desktop Underwriting system as of Dec. 8, 2018, to quickly determine whether a homeowner qualifies to refinance based on information provided.
  • Needs the homeowner to prove that he or she has the ability to cover at least six months’ worth of mortgage payments (or has six months of reserves) if their debt-to-income ratio (DTI) is higher than 45%.
  • Can be utilized if the property was acquired by the borrower at least six months prior to the date of the new mortgage loan (unless the property was acquired via inheritance or through a special circumstance such as divorce or separation)

Additional Refinance Requirements for Fannie and Freddie

If you’re interested in a cash-out refi, there are a few more things to know when it comes to Fannie Mae and Freddie Mac. Between them, they remain two of the largest financial institutions in the world, responsible for a combined $4.4 trillion in mortgage assets, according to Bloomberg News.  Despite this fact, many Americans don’t understand what Freddie Mac and Fannie Mae do for homeowners – especially when it comes to refinancing.

Those interested in a cash-out refinance should know that both agencies require at least 20% in home equity. If you’d rather look at an adjustable-rate mortgage (ARM), Fannie Mae requires at least 25% home equity.

It should be noted that these guidelines, among others, differ from programs that offer a no-cash-out refinance, such as the Freddie Mac Enhanced Relief Refinance (FMERR) and Fannie Mae’s High Loan-to-Value Refinance. Such options are for those who already owe more than what their home is worth and have been turned away by traditional lenders.

What to Know About Cash-Out Refinance

While it’s true that a cash-out refinance can provide a significant amount of money to a homeowner in short order, its risks can’t be ignored.

Because a cash-out refinance replaces your mortgage with a larger loan, it will come with a higher interest rate. In addition, things like homeowners’ insurance will be tied to the home’s value and your new loan. That means you’ll see a noted increase in such expenses if your cash-out refinance loan is significantly higher than your previous mortgage balance.

Finally, while it must be noted that you can use the proceeds of a cash-out refinance for any number of things, you should be smart about how you spend the money. Most people will use cash out for home improvement projects, which can increase the home’s market value. But others use it to pay off business ventures, other existing debt such as high credit card balances, or to lower education costs. In reality, other types of loans might be a better choice over using money from a cash-out refinance.

The best way to determine if a cash-out refi is right for you is to consult a lender and discuss eligibility requirements and any other concerns you have with cash-out refinance guidelines.


Author: Bryan Dornan

Bryan Dornan is a financial journalist and currently serves as Chief Editor of Cash Out Refi Bryan has worked in the mortgage industry for over 20 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, Linkedin and ActiveRain.

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