How to Repay a Family Member’s Loan at an FHA Cash-Out Closing

The Quick Read: An FHA cash-out refinance can pay off money you owe a relative, because cash-out proceeds are not limited to specific uses. The payoff comes out of the same equity pool as everything else, and FHA caps the new loan at 80% of the home’s appraised value. If the relative’s loan is a recorded lien, it has to be cleared at closing. If it is an unsecured note, the title company pays it from proceeds like any other payoff.

Can an FHA Cash-Out Pay a Relative?

Yes. The HUD Handbook defines a cash-out refinance as one where proceeds are not limited to specific purposes. A no-cash-out refinance only covers the old debt and closing costs. Paying a relative goes beyond that, so the loan is a cash-out.

HUD has no rule written for “family loans” as a category. What decides the outcome is how the loan was built and whether the general cash-out tests are met. Handbook text is revised from time to time, so confirm the current wording with your loan officer.

Across the wholesale programs Lendmire places files with, the FHA cash-out reaches 80% LTV on a home that at least one borrower has owned and lived in for 12 months before the case number. This article covers the family-loan piece. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.

Key Terms Defined

Recorded lien: A mortgage or deed of trust filed in the county records in the relative’s favor, which sits on the home’s title.

Unsecured loan: A promissory note or handshake loan with no claim on the house.

Payoff letter: A signed statement from the relative showing the amount owed and a daily interest figure if interest accrues.

Combined loan-to-value (CLTV): All loans against the home added together, divided by the appraised value.

Adjusted value: The FHA appraised value the 80% cap is applied to.

How the File Is Underwritten, Step by Step

1. Classify the family loan. Is there a recorded lien, or is it a note with nothing recorded? This one answer drives the rest of the file.

2. Check the home’s eligibility. Cash-out is for the home you live in. At least one borrower must have owned and occupied it for the 12 months before the case number. Renting out an inherited home resets that clock. The file also needs a documented mortgage payment history for the prior 12 months. HUD Mortgagee Letter 2020-30 says files that miss the payment-history test are downgraded to manual underwriting.

3. Get the payoff package. Expect a written payoff letter from your relative, signed, with the amount owed. If interest accrues, it shows a daily figure so the title company can pay the exact balance on the closing date. For a recorded lien, the release is recorded after closing so the new loan sits in first position.

4. Appraise the home. The FHA appraisal sets the value the cap is applied to. The old first mortgage, the relative’s payoff, closing costs, the upfront mortgage insurance premium, and any cash to you must all fit under the loan-to-value limit that applies to your transaction.

5. Underwrite the new payment. The new, larger first-mortgage payment, including FHA mortgage insurance, is what gets qualified. A debt that is paid at closing generally drops out of your monthly obligations. Standard ratios run from 31/43 up to 40/50 with documented compensating factors, and the automated finding governs most files.

6. Disburse at closing. The title company pays your relative directly from loan proceeds. It shows on the Closing Disclosure as a payoff. It is not a gift and not cash you receive.

The 80% Cap Sets the Ceiling

HUD Mortgagee Letter 2019-11 set the maximum LTV and CLTV on cash-out refinances at 80% of adjusted value. It applies to case numbers assigned on or after September 1, 2019. Before that, the limit was 85%. HUD’s press release explains the cut as a way to reduce risk to the FHA insurance fund and notes an earlier cut from 95% to 85%.

Some borrowers still assume 85% is available. It is not.

In practice, every dollar sent to a relative is a dollar that does not reach you. If the old mortgage uses most of the room under your lending limit, and the relative’s payoff takes a large share of what is left, the cash back to the borrower is small, and closing costs come out of the same pool. Run that math with your loan officer before you promise your relative a date or an amount.

Secured or Unsecured: Where the Paths Split

A recorded lien left in place uses up room the new first loan could have used. That is why HUD’s framework uses CLTV. A subordination agreement is the alternative to payoff, but on a cash-out the usual path is to pay it and clear title. Mortgagee Letter 11-11, an older HUD document, treats an existing subordinate lien as something a refinance must address. Use it as background only.

Where the General Rule Breaks

If you used the family loan to fund your original purchase, how it was documented at the time matters. A real, repayable loan has to be disclosed as a loan, not relabeled a gift.

Your relative wants to co-sign. Skip it. Income from a non-occupant co-borrower cannot be used to qualify a cash-out refinance. A relative’s income will not make the file work.

The home is not your primary residence. FHA cash-out is for owner-occupied principal residences only. A second home or rental does not qualify.

Mortgage payments in the past year were late. The payment-history test is a hard gate. A file that misses it gets pushed into manual underwriting and may not work at all.

You expected conventional rules. Other programs treat debts differently. Fannie Mae’s Selling Guide lets certain debts paid at closing drop out of conventional DTI. That is a conventional rule. Do not carry it over to FHA.

What the Borrower’s Decision Looks Like

The monthly budget changes in a specific way. A larger mortgage payment, including FHA mortgage insurance, replaces the family note’s own payment. The upfront premium is 1.75% of the base loan and can be financed. The annual premium runs between 0.15% and 0.75% of the balance depending on term, loan amount and LTV. On a thirty-year loan above ninety percent LTV, it lasts for the term. At or below ninety percent, it ends after eleven years.

Consider the tradeoff. A family note that might have been paid off in a few years becomes part of a mortgage that runs much longer. The Federal Reserve’s consumer guide notes that many advisers caution against using cash-out refinancing to pay down unsecured debt. Moving the debt into the mortgage does not erase it.

There is a credit angle, but it is indirect. CFPB research found that cash-out borrowers’ credit scores improved sharply at first, then gradually worsened, with card and auto balances falling around the refinance. Family loans typically do not appear on credit reports, so the effect on your score comes from the new mortgage, not from clearing the note.

The program envelope: maximum financing on the cash-out is 80% LTV, from a decision score of 580 or higher on the networks Lendmire places with, and county loan limits apply. Everything is subject to lender guidelines and full file review.

Documents to Have Ready

• The original note or written agreement, if one exists.
• A signed payoff letter from your relative with the balance and any daily interest.
• The recorded lien paperwork, if the loan is secured.
• Twelve months of mortgage payment history.
• Proof of 12 months’ ownership and occupancy of the home.
• Wiring or payment instructions for your relative, which the title company confirms directly.

If the loan was never written down, write it down now. An informal loan with no paper is the hardest one to document at closing. A short signed statement from your relative, confirming the balance and that the debt is repaid in full at closing, gives the file something to hold.

Tax Note

Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit. Your relative should do the same about any interest received or any part of the balance forgiven.

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. Lendmire is a mortgage broker and arranges loans through wholesale lenders; nothing here is a commitment to lend.

For your own numbers, request a scenario review with Lendmire.

For current guidelines and terms, see Lendmire’s FHA loan programs page.

About Lendmire

Lendmire is a mortgage brokerage (NMLS# 2371349) licensed for consumer mortgage lending in 16 states, arranging FHA, VA, conventional and jumbo purchase and refinance loans through a wholesale lending network. Eligibility is determined by the lender on each file. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. HUD Mortgagee Letter 2020-30

2. HUD Mortgagee Letter 2019-11

3. HUD press release on cash-out risk

4. Mortgagee Letter 11-11

5. Fannie Mae’s Selling Guide

6. Federal Reserve, A Consumer’s Guide to Mortgage Refinancings

7. CFPB research