The Quick Read: FHA cash-out refinance requirements for a private note are the same as for any payoff: you need to own and occupy the home as your principal residence for 12 months, stay within 80% LTV, and document a clean payment history on the note. The private note adds paperwork, not new rules. The note holder has to supply a written payoff, and you have to prove you paid on time because the note is probably not on your credit report. Everything here is subject to lender guidelines and full file review, and nothing is a commitment to lend.
- Principal residence only. No second homes, no rentals.
- At least 12 months of ownership and occupancy before the FHA case number is assigned.
- Maximum leverage on a cash-out is 80% LTV.
- Payment history on the private note must be documented, not assumed.
- A written payoff from the note holder is required.
- A paid-off private second often gets treated as cash-out even when you take no cash.
What Is a Private Note in This Context?
A private note is a mortgage or lien held by a person or company that is not a bank or a mortgage servicer. Think seller-carry notes, family loans secured by the house, private seconds used for a rehab, and balloon notes from a private lender.
FHA cash-out estimate
Seeded with an example value, a balance to match, and a round cash request; change any field.
Editable benchmark: 7.24% as of October 29, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not an FHA cash-out refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $193,000 current balance, the FHA cap on a principal residence with the upfront premium financed, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
An illustration, not a Loan Estimate, an approval, a quote, or a commitment to lend. The rate shown is the weekly Freddie Mac thirty-year conventional benchmark, used as a market reference; an FHA cash-out is priced by the lender at lock, and this is not an FHA cash-out refinance quote. HUD’s cap limits the base loan; the upfront premium is financed on top of the capped base loan; the monthly premium for the first year follows the snapshot’s schedule. Cash available means the base loan the cap permits less the balances retired, before closing costs, which this calculator leaves out. The line figure applies the line program’s combined loan-to-value ceiling to the same value and balance. Taxes and insurance are estimates you can edit. Licensed in sixteen states for consumer mortgages.
HUD’s rules do not carve out private notes by name. The rules for any payoff apply, and the handling below is how those rules play out when the lien holder is a private party. That is how the file works in practice, not special HUD language.
Why Does Paying Off a Private Note Usually Make It a Cash-Out?
Lenders classify a refinance as cash-out when the proceeds go beyond paying off the existing debt and the transaction costs. A private second that did not fund the purchase of the home usually pushes the file into cash-out treatment, even if you walk away with no money.
Here is how the classification typically breaks:
1. The note funded the purchase. A seller-carry second written at the time you bought the house is closer to purchase-money debt. Some lenders treat the payoff more like a rate-and-term refinance.
2. The note did not fund the purchase. A family loan, a rehab loan, or a private second taken out later is borrowed against equity. Paying it off is a cash-out transaction.
The classification matters because the leverage limits differ. Across the wholesale programs Lendmire places files with, the FHA rate-and-term refinance reaches 97.75% on a principal residence occupied for the previous 12 months. The FHA cash-out reaches 80% LTV. That is a big gap, and a file classified the wrong way at intake can fall apart at the appraisal. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.
Lendmire’s FHA cash-out refinance program page lays out how these loans are arranged through wholesale lenders. Lendmire is a mortgage broker, not the lender, and the lender makes the final classification call.
The Core Requirements, Applied to a Private Note
| Requirement | How it works with a private lien | What to document |
|---|---|---|
| Occupancy | Principal residence only | Utility bills, employment records |
| Ownership and occupancy | 12 months before case number | Deed, closing statement |
| Leverage | 80% LTV on cash-out | Full appraisal |
| Payment history | Prove timely payments on the note | Note plus bank records |
| Payoff | Written statement from holder | Payoff letter |
| Credit | 580 decision score at the start of the wholesale programs | Credit report |
A few points need more explanation than a table allows.
Occupancy and ownership. The 12 months count backward from the FHA case number assignment, not from closing. A borrower who bought eleven months before the case number is assigned is not eligible. Appreciation does not shorten the wait. Equity and the ownership test are separate questions.
Leverage. The total of the first-mortgage payoff, the private note payoff, closing costs, and any cash to you has to fit under 80% of the adjusted value. At least 20% equity has to remain in the home. County loan limits apply on top of that.
Credit and ratios. The wholesale programs Lendmire works with start at a 580 decision score. The base debt-to-income pair is 31/43 (housing and total) with no compensating factors. Documented compensating factors can reach 40/50 at the top tier, and the automated finding governs most files. FHA cash-out loans are scored through HUD’s TOTAL scorecard, so the file is run through it even if it is then manually underwritten. HUD’s latest mortgagee letter on credit scoring, Mortgagee Letter 2026-11, adds alternative credit-score models and says a transaction is ineligible when the minimum decision credit score falls below 500. Check its effective date before relying on any change in it. The wholesale programs sit above that HUD floor.
Non-occupant co-borrowers. Income from a co-borrower who does not live in the home cannot be used to qualify on a cash-out loan. This catches families who were planning to add a parent or sibling to the file.
How Do You Document Payments on a Note That Isn’t on Your Credit?
This is where private-note files stall. A bank mortgage shows up on the credit report with a payment history attached. A private note usually does not. The lender still needs proof you paid on time over the prior 12 months.
HUD’s guidance on mortgages not on the credit report lists acceptable evidence for TOTAL-scored loans:
- A copy of the note plus bank statements or canceled checks.
- A credit report supplement.
- A verification of mortgage.
For manually underwritten loans, the lender determines housing payment history through a verification of mortgage received directly from the servicer, or through canceled checks covering the most recent 12 months. HUD’s page is dated, so lenders re-check it against the current handbook.
A private holder has no servicing system, so the practical evidence is the note itself plus 12 months of bank statements or canceled checks that match the payment amount and due date in the note. Some lenders go further and refuse handwritten verifications of mortgage. That is a lender overlay, not a HUD rule, but it shapes what your file needs to carry.
Failure modes show up fast:
- Cash payments with no paper trail.
- Payments that differ from the note’s stated terms.
- Interest-only or balloon structures where the “payment” is irregular.
- Payments made from an account not in the borrower’s name.
Fix the paper trail before the file goes in. Gathering bank records after the lender asks for them is how a file sits idle.
The Payoff Statement and Lien Release
HUD requires the lender to obtain a payoff statement for the existing debt being refinanced. HUD’s archived refinance guide also treats the payoff statement as part of the case binder. A bank servicer generates this automatically. A private holder has to write one.
The process goes like this:
1. Ask the holder for a written payoff. It should show principal, accrued interest, any default interest, any prepayment or exit fee, and a per-diem amount.
2. Check the good-through date. The payoff has to cover the day the old note is actually paid at funding. A stale payoff leaves the closing short.
3. Confirm how the lien is recorded. A recorded deed of trust or mortgage has to be released at funding. An unrecorded note still needs a written release and title review.
4. Let title clear the lien. The title company or closing agent collects the payoff, sends it, and confirms the release.
5. Reconcile the settlement figures. The payoff line on the Closing Disclosure has to match the holder’s statement.
Items that inflate the payoff figure are worth asking about up front:
| Item | Why it matters |
|---|---|
| Accrued interest | Grows each day until funding |
| Default interest | Applies if the note went late |
| Exit or prepayment fee | May be written into the note |
| Per-diem | Needed if funding date moves |
Keep paying the old note until payoff. It is still owed until funding, and a late payment on it can create problems for the new loan.
How Is the Loan Sized With a Private Note in the Payoff Stack?
Take a homeowner whose house appraises at a given value. Run the stack in percentages of that value: first-mortgage payoff, private note payoff, closing costs, and financed upfront mortgage insurance premium, plus any cash to the borrower. The total has to sit at or below 80% of adjusted value.
If the stack lands at 76%, there is room for modest cash back. If it lands at 82%, the file does not work as submitted. That leaves three options: pay down the balance, negotiate the private note payoff, or change the structure.
FHA requires a full appraisal on a cash-out. The streamline is the product that skips one, and it applies only to an existing FHA loan. A private note is usually non-FHA debt, so the streamline generally does not fit.
Mortgage insurance is part of the sizing. Across the wholesale programs Lendmire places, the upfront premium is 1.75% of the base loan and is financed. The annual premium falls between 0.15% and 0.75% of the balance depending on term, loan amount, and LTV. On a thirty-year loan above 90% LTV the annual premium lasts for the term. At or below 90% it ends after eleven years. Because cash-out tops out at 80%, the shorter duration generally applies to this product. Premium figures are program facts, not a price, and HUD now carries current premium schedules in its handbook, so the loan estimate is what governs your cost.
Costs reduce what you actually net. Closing costs, the financed premium, and the payoff all come out of the new loan before cash reaches you. Some borrowers expect a check and find a payoff.
What Happens If the Note Holder Is Slow or Disputes the Balance?
The file waits. A payoff that is late, wrong, or disputed holds the loan, because the lender cannot close without a written number it trusts.
Common situations:
- Holder is slow. Send the request in writing, name the funding date you need, and give them the title company’s contact information.
- Balance is disputed. Resolve it before applying. A disputed balance cannot be paid off cleanly, and title will not clear a lien that is contested.
- Holder will not release. Without a release, the refinance does not clear title. This is a title problem, not a lender problem.
- Short payoff. If the maximum mortgage is too small to retire the debt, a rate-and-term refinance can proceed only if the existing holder writes off the shortfall. A private holder must agree to the write-off in writing.
Family notes carry the most risk of casual paperwork. A parent who lent money informally may have no recorded lien, no note, and no payment record. Build the documents before the application, not during it.
Where the General Rule Breaks
These edge cases come up on private-note files.
Owned or occupied less than 12 months. Standard cash-out is not available. A no-cash-out refinance has a higher leverage limit (97.75% on a principal residence occupied for the previous 12 months, per the program parameters), but a private second that did not fund the purchase can complicate that classification.
Inherited property that was rented. You are not eligible for cash-out until you have occupied it as a principal residence for 12 months.
Property owned free and clear. It can be refinanced as cash-out. HUD’s Mortgagee Letter 2020-30 addresses payment history and free-and-clear properties.
Multiple recent cash-outs. Some lenders refuse a second cash-out on the same property within a set window. That is a lender overlay, not a HUD rule.
Active sale listing. Some lenders require a listing to be expired or withdrawn before application.
Rental or second home. FHA cash-out is a principal-residence product. Occupancy decides the leverage, and a non-owner-occupied property is not an FHA cash-out path.
Streamline confusion. The streamline’s seasoning test is six payments and 210 days from the date title was recorded for the loan being refinanced. That test belongs to the streamline, not to cash-out. Cash-out leans on 12 months of ownership and payment history.
Key Terms Defined
Private note: A loan secured by your home that is held by a person or company, not a bank or servicer.
Payoff statement: A written figure from the holder showing what it takes to retire the debt on a specific date.
Lien release: The recorded or written document that removes the note’s claim on the property.
Seasoning: The required time you must have owned, occupied, or paid on a loan before a refinance is allowed.
LTV: Loan-to-value, the total new loan as a percentage of the home’s appraised value.
Case number: The FHA identifier assigned to the file; the 12-month clock counts back from it.
Common Misconceptions
“A private note is not on my credit, so no one checks it.” The lender still needs documented payment history. The note plus bank records is the usual route.
“If I get no cash back, it is not a cash-out.” Cash-out status turns on what the proceeds do. A paid-off private second that was not purchase-money often triggers cash-out treatment.
“FHA lets me borrow up to 97.75%.” That is the no-cash-out refinance figure. Cash-out is 80%.
“The seasoning period is counted from the date title was recorded.” It is measured by when the case number is assigned, and the exact timing varies by file and lender.
“A co-signer who does not live there can carry my income.” Not on a cash-out.
“Once I sign, it is done.” A primary-residence refinance carries a three-business-day right of rescission, and Saturdays count. If you cancel, the old loan is still owed. See the CFPB’s explanation of the right of rescission. The old note is paid at funding, after the window closes.
What Does the Decision Look Like in Practice?
Rolling a short-fuse private note, such as a balloon, into a long-term FHA first mortgage can swap a lump-sum maturity for a fully amortizing payment. The new loan is larger than the old first, and mortgage insurance is added to the payment. A cash-out can also lengthen the time it takes to pay off the home, a point the CFPB’s home-equity guide makes directly.
The cash is new debt secured by the home. Missed payments can lead to foreclosure.
| Option | Fits when | Watch for |
|---|---|---|
| FHA cash-out | 12 months owned and occupied, 20% equity left | 80% cap, payoff and history paperwork |
| FHA rate-and-term | Note funded the purchase, short payoff | Classification by the lender |
| FHA streamline | Existing debt is an FHA loan | Generally not a private note |
| Conventional or other | FHA ratios or equity do not fit | Different leverage and score rules |
Documents to gather before applying:
- The note and any modification.
- Twelve months of bank statements or canceled checks showing each payment.
- A written payoff from the holder with a good-through date.
- Proof of occupancy: utility bills, employment records.
- Deed and settlement statement from your purchase.
- Evidence the lien is recorded, or a plan to document it.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
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. A separate piece How Much Cash a Cash-Out Refinance Returns After a Private Note Payoff covers the sizing.
Frequently Asked Questions
Can an FHA cash-out refinance pay off a private second mortgage?
Yes, when the home is your principal residence, you have owned and occupied it for 12 months, and the new loan stays within 80% LTV. The lender needs a written payoff and documented payment history on the note. Final eligibility depends on lender guidelines and full file review.
Does it count as a cash-out if I take no money at closing?
Often, yes. Lenders commonly treat payoff of a private second that did not fund the purchase as cash-out, because the classification follows what the proceeds do. The lender makes the final call, and it changes your leverage limit.
How do I prove I paid a private note on time?
Provide the note plus bank statements or canceled checks covering the prior 12 months, a credit supplement, or a verification of mortgage. HUD lists these as acceptable for loans not on the credit report. Payments should match the note’s amount and due date.
Can a family member who does not live in the house help me qualify?
Not on a cash-out. Income from a non-occupant co-borrower cannot be used to qualify on this product. A non-occupant co-borrower is allowed on an FHA purchase, which is a different transaction.
What if my private note holder will not provide a payoff?
The file cannot clear title without a written payoff and lien release. Put the request in writing with the funding date, loop in the title company, and resolve any balance dispute before applying. A short payoff needs the holder’s written agreement to write off the shortfall.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
As a mortgage broker (NMLS# 2371349), Lendmire helps homeowners and home buyers in 16 states with FHA, VA, conventional and jumbo purchase and refinance loans arranged through wholesale lenders. Lendmire is never the lender; program terms are set by the lender and the agency guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. HUD Mortgagee Letter 2026-11
2. HUD answers: verification of rent or mortgage
3. HUD archive refinance guide
4. HUD Mortgagee Letter 2020-30
This article is part of Lendmire’s FHA cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: FHA Cash-Out Refinance Requirements to Consolidate Credit Card Debt · FHA Cash-Out Refinance Requirements on a Recently Bought Home · FHA Cash-Out Refinance Requirements to Buy Another House
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Disclosure information. Lendmire is a state-licensed mortgage brokerage under NMLS# 2371349. Lendmire is not a depository institution, direct lender, or financial advisor — all loans referenced are placed through wholesale lender partners and are subject to each lender's underwriting standards. This article is provided for general informational purposes and is not a commitment to lend, nor does it constitute financial, legal, or tax advice. Loan programs, terms, rates, and qualification standards change without notice and depend on borrower profile, property type, and the state in which the subject property is located. Equal Housing Opportunity provider. NMLS Consumer Access: nmlsconsumeraccess.org.