The Quick Read: An FHA cash-out refinance can pay off a family or partner note, because cash-out proceeds are not limited to specific purposes. The new loan pays off your current mortgage first, and what remains can settle the note. The deal turns on how the note is documented, whether the person is on title, how long you’ve owned and lived in the home, and whether the appraised value leaves room under the 80% cap.
How Does an FHA Cash-Out Pay Off a Note?
It replaces your current mortgage with a larger one, and the extra amount becomes your payoff money. The title company sends your old lender its payoff, then pays the family member or partner directly from the proceeds. Anything left goes to you.
HUD’s own guidance says a cash-out is a refinance of an existing mortgage where the proceeds are not limited to specific purposes. That’s why a private note fits. The lender doesn’t care much whether the cash pays a contractor or a parent. It cares that the debt is real, documented, and paid through closing.
Here is the plain version of the flow:
1. The new loan pays off your existing first mortgage.
2. It covers closing costs and the financed upfront mortgage insurance premium.
3. It pays the note holder through title.
4. Any remaining cash comes to you.
Everything in that list must fit under the leverage cap. Across the wholesale programs Lendmire places FHA files with, the FHA cash-out reaches 80% of the home’s appraised value. Total debt on the home counts toward that 80%, so any lien that stays uses up room.
Key Terms Defined
Cash-out refinance: A new mortgage that pays off the old one and gives you cash from your equity.
Note holder: The person you owe under a written promise to pay, such as a parent, sibling, or business partner.
Secured note: A note backed by a lien recorded against your home.
Unsecured note: A note based only on a promise to pay, with no recorded lien.
On title: Named as an owner on the deed. This is different from being a creditor.
Payoff statement: A written statement of exactly what’s owed on a debt on a given date.
Is the Person on Title or Just a Creditor?
This is the question that decides the structure. Someone on title owns part of the home. Someone holding a note is owed money. The lender treats them differently.
| Situation | What they hold | How the lender sees it |
|---|---|---|
| Co-owner on title | Ownership share | Possible equity buyout |
| Note holder, secured | Recorded lien | Existing lien paid at closing |
| Note holder, unsecured | Promise to pay | Use of cash-out proceeds |
HUD has no rule written for a “family note.” It does address buying out a title-holder’s equity. Under HUD Handbook 4000.1, as reproduced by a compliance reference site, that equity can count as property-related indebtedness in the new mortgage calculation. The lender must get a divorce decree, settlement agreement, or other legally enforceable equity agreement. The same text treats that buyout inside the no-cash-out refinance discussion.
A casual agreement between partners doesn’t meet that bar. Put it in writing, signed, with the amount stated.
Whether your buyout counts as no-cash-out or cash-out is the underwriter’s call. Treat it as an open question until the lender confirms. If it’s classified as cash-out, the full cash-out tests apply. Plan for that version.
What Does the Lender Check?
Expect five things. From years of arranging these files, the ones that trip people up are rarely credit. They’re seasoning and paperwork.
Ownership and occupancy. The FHA cash-out requires the home to be owned and lived in as your principal residence for 12 months before the case number is assigned. A recent buyer can’t use it. Second homes and rentals aren’t eligible for cash-out.
Appraised value. The appraisal sets the value the 80% cap is measured against. A low appraisal shrinks the cash available, and the note payoff competes with everything else for that room.
Credit. The wholesale programs Lendmire works with start at a 580 decision score. HUD itself has a lower tier, but the network doesn’t reach below 580. Program figures are subject to lender guidelines and full file review.
Ratios. The base pair is 31/43, housing to total debt. Documented compensating factors can reach 40/50 at the top tier, and the automated finding governs most files. If the note had a monthly payment, it drops out after payoff. The new housing payment will almost certainly be larger than your old one, so compare totals before you commit.
Ability to qualify alone. Income from a non-occupant co-borrower generally can’t be used to qualify on a cash-out. You can’t add a relative to make the numbers work. Plan to carry the loan yourself.
What Paperwork Does a Note Payoff Need?
The lender must see that the debt is real and that the money reaches the right person. Gather these early:
- The signed note or written agreement.
- A current payoff statement from the note holder.
- Proof the original money was actually transferred, such as bank records.
- A decree or signed equity agreement, if you’re buying out a title-holder.
- A lien release, if the note is recorded.
- Proof of occupancy, such as utility bills or employment records.
Handshake loans are the hardest. Cash-out proceeds can pay them, but the lender will still want written proof of the debt and its payoff amount. Draft a simple note and payoff letter with the family member before you apply.
Undocumented cash handoffs are a red flag. Proceeds should travel through title to the creditor, not through your own account. Partial forgiveness raises its own questions, since a forgiven amount is treated differently from a paid one. If a relative wants to forgive part of what you owe, say so up front and let the lender decide how to document it. For tax questions, tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
How Does Closing Work?
Closing follows the same path as any consumer refinance. The CFPB’s guide to the Loan Estimate and Closing Disclosure explains that a loan is disclosed as a refinance when it pays off an existing obligation secured by the property, even if the new creditor doesn’t hold the original debt. You receive a Loan Estimate after applying and a Closing Disclosure ahead of closing, and the exact timing varies by file and lender. Compare the two line by line.
On the Closing Disclosure you’ll see the payoff to your old lender, the payoff to the note holder, closing costs, and any cash to you. Under Regulation Z, a refinance replaces an obligation already secured by the dwelling, and the consumer may or may not receive cash. If a lien secures the family note, its release should be delivered through title.
If you’re thinking about this route, Lendmire’s FHA cash-out refinance program page lays out the program basics before you run your own numbers.
What Does It Cost You?
Several costs ride on the new loan, and they’re easy to underestimate.
Mortgage insurance. The FHA upfront premium is 1.75% of the base loan, usually financed. The annual premium runs between 0.15% and 0.75% of the balance, depending on term, amount and LTV. On a thirty-year loan above 90% LTV, it lasts the life of the loan; at or below 90%, it ends after eleven years. A cash-out at 80% falls in the second group. HUD cut the annual premium by 30 basis points for most borrowers on loans endorsed after March 2023, which is one reason older articles overstate the cost.
Closing costs. CFPB research notes that cash-out closing costs can be substantial, including origination, appraisal, title and taxes. These come out of the same pool as your note payoff.
A bigger balance. You’re converting a family obligation into debt secured by your home. A missed payment on this loan carries foreclosure risk that a family note never did. That isn’t a reason to avoid it. It’s a reason to be sure.
Where the Math Breaks
Say your home’s appraised value supports the 80% cap. Subtract your current mortgage balance. Subtract closing costs and the financed premium. What remains is the most you could put toward the note.
That gap is often smaller than people expect. If your mortgage is already near 70% of value, you have roughly ten percentage points of room before costs. Paying the note might consume all of it, or more.
If the note is larger than what’s left, you have options:
- Pay part now and renegotiate the rest.
- Wait for appreciation or paydown to widen the margin.
- Sell, if the note and mortgage together are heavy.
Edge Cases Worth Knowing
Existing FHA loan. The FHA Streamline needs no appraisal, but it doesn’t deliver meaningful cash. It can’t fund a partner payoff.
Short payoffs. If the maximum new loan can’t fully extinguish an existing secured debt, the existing note holder must accept a write-off of the shortfall. An older HUD handbook allowed a new subordinate lien for a shortfall, but that version is retired. Don’t rely on it today.
Inherited homes. HUD’s handbook has handled inherited property differently on the occupancy period, but the language is old and secondhand. Ask the lender what applies to you.
Quitclaim deeds. Signing someone off the deed doesn’t remove them from the loan or change occupancy history. Only a payoff, a refinance, or an approved assumption releases a borrower.
Delayed financing. That’s a conventional concept, not an FHA one.
How Does FHA Compare With Other Paths?
| Option | Fits when | Watch out for |
|---|---|---|
| FHA cash-out | Credit is modest; 12 months of occupancy met | 80% cap; premiums on the whole loan |
| Conventional cash-out | Credit and equity are strong | Stricter credit expectations |
| Renegotiate the note | Family can wait or restructure | Informal terms stay risky |
| Sell the home | Equity is thin against debts | You lose the home |
FHA is often the more flexible choice when credit has taken a hit. Conventional may cost less in mortgage insurance when your credit is strong and equity is deep. The flip point is your credit profile and how much cushion sits above the 80% line.
Frequently Asked Questions
Can I pay back a parent with an FHA cash-out?
Yes, if you meet the ownership and occupancy test and the numbers fit under the 80% cap. Proceeds aren’t limited to specific purposes, but expect to document the debt with a signed note and a payoff statement.
Does the note need to be recorded?
No. A recorded lien is simply paid off through title. An unsecured note is treated as a use of cash proceeds. Either way, the lender will want written proof of the debt and the amount owed.
Can a relative co-sign to help me qualify?
Generally not on a cash-out. Income from a non-occupant co-borrower can’t be used to qualify, so you should plan to carry the loan on your own income.
Will the lender call this a buyout or a cash-out?
It depends on whether the person is on title with a documented equity agreement. A true title-holder buyout may be handled as a no-cash-out refinance. A note-only creditor is usually paid from cash-out proceeds. The underwriter decides.
What if my relative wants to forgive part of the note?
Tell the lender early. A forgiven amount isn’t a payoff, and it can change how the transaction is documented. Because tax treatment can depend on your situation, speak with a qualified tax professional.
If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire — NMLS# 2371349 — is a mortgage broker that arranges FHA, VA, conventional and jumbo home purchase and refinance financing in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
For current guidelines, see FHA loan programs.
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References
1. HUD Mortgagee Letter 2023-05
2. HUD Handbook 4000.1 refinance provisions (compliance reproduction)
3. CFPB TILA-RESPA Guide to Loan Estimate and Closing Disclosure
5. CFPB research on cash-out refinances
6. HUD 4155.1 Ch. 3 Sec. B (retired handbook)
This article is part of Lendmire’s FHA Loan series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: FHA Cash-Out Requirements vs What an FHA Streamline Allows · FHA Cash-Out vs Conventional on a Paid-Off Home: Insurance vs Credit · How to Do an FHA Cash-Out on a Texas Second Home
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.