The Quick Read: A rental cash-out refinance can repay a family loan up to the smaller of two limits: the loan your equity allows and the loan your rent coverage supports, after the existing first mortgage payoff and closing costs come out first. Whatever room is left is the family repayment, and anything beyond that is cash to you.
- No rule fixes a percentage. The new loan size sets the answer.
- On a standard rental, cash-out refinances top out around 75% of value across most of the network.
- If no cash comes back beyond the payoffs and costs, the file may be treated as a rate-and-term refinance instead, which allows higher leverage.
- A signed note, a payment history, and a payoff letter make the payoff routine. A handshake loan makes it harder.
- Rent coverage can cut the loan before equity does.
What Is Actually Being Repaid?
Most family loans come in three forms: a formal note, an informal advance, or a gift that someone later calls a loan.
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A formal note has a signed promissory note and usually a recorded lien on the property. The relative holds a security interest, and payoff releases it. An informal advance is money that moved by bank transfer with a verbal “pay me back when you can.” A gift is money no one expects back.
That third category matters. A gift is not owed to anyone, so there is nothing to repay out of loan proceeds. Cash that flows back to a donor can look like a disguised payoff. Programs in the network treat gift-versus-loan funds differently, so confirm the treatment with the broker before you commit to a payoff plan.
This article covers the formal-note and informal-advance cases, because those are the ones a refinance can actually retire.
How Does Underwriting Treat the Payoff, Step by Step?
Underwriting treats the family payoff like any other debt that must be satisfied at closing. The lender checks the new loan against the value cap, tests the rent against the larger payment, and confirms the debt and the payoff on paper. Here is the order.
Step 1: Label the transaction. A new loan that pays off the first mortgage, the family note, and closing costs, with no cash back, may be treated as a rate-and-term refinance. Any cash beyond that makes it a cash-out refinance. The label sets the leverage ceiling. Across most of the network, cash-out stops around 75% of value on a standard rental. Rate-and-term typically reaches higher, up to about 85% on select programs, subject to lender guidelines. Whether a family-note payoff earns the rate-and-term label is the lender’s call.
Step 2: Size the loan against value. The appraisal sets value. A rental appraisal typically pairs a rent schedule (Form 1007) with a small-residential-income report (Form 1025 on 2-4 units). The loan cap is the program percentage times the appraised value. Everything sits inside that cap: the first mortgage, accrued interest on the family note, any exit fee, and closing costs.
Step 3: Run the rent test on the bigger loan. Debt service coverage is monthly rent divided by the full monthly obligation: principal, interest, taxes, insurance, and any HOA dues. A larger loan means a larger obligation, so coverage must hold on the new balance. Across the network, 1.00 is where many select programs start, and stronger ratios open better terms and leverage. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted.
Step 4: Check credit, reserves, and seasoning. A 620 score is the floor in parts of the network. Most programs want around 660, and 700 or higher unlocks the strongest tiers. Reserves commonly run around 6 months of the full monthly obligation. Loans above $1,500,000 typically step up to about 9 months. Cash-out generally wants about 6 months of ownership, measured from title recording.
Step 5: Document the family debt. The lender wants evidence that the debt exists and what it costs to retire. More on that below.
Step 6: Title and closing. Title confirms lien position. The payoff is wired to the relative, the release is recorded, and the new mortgage is recorded. If the family loan was never recorded, title has no lien to release. The lender still wants proof of the debt and the payoff amount.
What Is the Formula for the Repayable Amount?
The repayable amount is the maximum new loan minus the first-lien payoff minus closing costs and prepaids. The maximum new loan is the smaller of the value limit and the rent-supported limit. Compare what is left to the family balance to get your percentage.
Reserves are a separate check. They usually come from your own liquid funds, not from the loan, so keep them out of the subtraction unless the lender says otherwise.
Here are three modeled scenarios. These are illustrative assumptions, expressed as a percentage of appraised value, not market data or a program promise.
| Item (% of value) | Full payoff | Partial payoff | Rent-limited |
|---|---|---|---|
| Loan the equity allows | 75% | 75% | 75% |
| Loan the rent supports | 75%+ | 75%+ | 55% |
| Existing first mortgage | 40% | 55% | 40% |
| Family note balance | 20% | 25% | 20% |
| Closing costs (assumed) | 3% | 3% | 3% |
| Room for family payoff | 32% | 17% | 12% |
| Share of note repaid | 100% | 68% | 60% |
In the first column, the payoffs and costs total 63%, well under the cap. The family note is repaid in full, and the remaining room is either unused or becomes cash to you. In the second, the first mortgage eats most of the room, so only about two-thirds of the note is repaid. In the third, equity looks fine, but rent coverage caps the loan lower, and the family gets 60%.
The third column is the one that surprises people. A property can have plenty of equity and still be too thin on rent to carry the larger balance. Rent coverage can cut the loan before equity does.
Does the Relative Need to Be Paid in One Piece?
No. A payoff can be partial, and the balance can stay as a smaller note or be settled from another source.
A staged payoff is common when the numbers fall short. Say the family balance exceeds the room the refinance creates. You can repay what the loan supports, and the rest stays between you and your relative, on revised terms. Whether the remaining family debt can stay secured by a lien on the property is a question for the lender, since the new first mortgage generally requires first position and may restrict junior liens.
A larger down payment on a purchase lowers the monthly obligation and can lift coverage. On a refinance, the same logic applies in reverse: paying down the first mortgage with other funds first can improve both the value test and the rent test. It never erases leverage caps, credit floors, reserve rules, or property eligibility. The strongest files clear both tests: enough equity and enough rental coverage.
What Paper Does a Lender Want for a Family Loan?
A clean file has four items: a signed promissory note, a recorded security instrument if one exists, a payment ledger, and a payoff letter with a per-day figure for accrued interest.
Timing of the paperwork matters. A note signed after the fact carries less weight than one made when the money moved. Retroactive documents that conflict with bank records can hurt the file. If your payments went out of a checking account with statements you can produce, the trail is easy to follow. Payments in cash are harder to verify.
An unrecorded or verbal loan carries more risk. Underwriting may treat it as an undocumented obligation, and an unclear source-of-funds history can slow review. If your family loan sits in that category, tell your broker up front so the file is built around it.
Where Does the General Rule Break?
Several situations change the math. These are the named edge cases.
The family loan funded the purchase. If a relative’s money bought the property, the refinance is often a repayment of purchase money. Agency guides address this with a delayed financing exception, which still prices the transaction as cash-out. See the Fannie Mae Selling Guide section on cash-out refinance transactions for the agency version. DSCR programs are not agency products. Seasoning and cost-basis limits are set by each program, so ask early whether a recent purchase caps proceeds at documented cost.
A related-party purchase. If you bought the property from a relative, program treatment can differ from an arm’s-length sale. Confirm it before you plan around it.
Title in an LLC, note to an individual. If the family loan was made to you personally but the property sits in an LLC, the debtor and the title holder do not match. LLC-titled borrowers are generally supported, subject to lender program eligibility, but the mismatch is a title and underwriting question to settle before you apply.
An interest-free or forgiven note. If your relative forgives part of the balance, that amount is generally treated as a gift, not a repayment. Interest-free family notes can also raise tax questions. Tax treatment varies; consult a qualified professional.
Property type. Manufactured homes (single- and double-wide), log homes, and barndominiums are not offered through the network’s DSCR programs, so no payoff plan can rescue them.
A short-term rental. Cash-out on short-term-rental collateral tops out around 70% LTV, versus 75% on a standard rental. Expect a 640+ score and about 12 months of hosting history. Lendmire’s piece How Much Cash Comes Out of a Short-Term Rental Cash-Out Refinance to Repay a Private Note? covers that case in depth. Short-term rental rules can vary by city, county, HOA, and property type, so investors should confirm local rules before relying on projected rental income. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.
Why Is a DSCR Loan Treated as Business Purpose?
DSCR loans are designed for non-owner-occupied investment properties. Because they are business-purpose investor loans, they are reviewed differently from a standard owner-occupied mortgage. The CFPB’s Regulation Z scope rule exempts credit extended primarily for a business or commercial purpose, and that is why this file runs on the property’s rent instead of your pay stubs.
The practical consequence: proceeds that go to personal spending can complicate the purpose of the loan. Paying a relative who funded the rental is generally consistent with the investment purpose, but ask your broker how the lender documents it.
Key Terms Defined
Cash-out refinance: a new loan that pays off the old one and returns extra cash to you, at a lower leverage ceiling.
Rate-and-term refinance: a new loan that only replaces existing debt and costs, with no cash back at closing.
LTV (loan-to-value): the loan balance divided by the appraised value of the property.
DSCR (debt service coverage ratio): monthly rent divided by the full monthly obligation. Clearing it is not the same as positive cash flow, since repairs, vacancy, management, utilities, and capital costs sit outside the calculation.
PITIA: principal, interest, taxes, insurance, and HOA dues, the full monthly obligation the rent must cover.
Seasoning: the waiting period a program wants between buying a property and a cash-out refinance, about 6 months from title recording on most files.
Payoff letter: a written statement from the lender of record (here, your relative) fixing the exact amount owed on a given date.
What Does the Decision Look Like in Practice?
The decision comes down to four paths. Pick the one your numbers support.
| Your situation | Likely path |
|---|---|
| Room covers the note and costs | Refinance and repay in full |
| Room covers part of the note | Partial payoff, stage the rest |
| Equity is fine, rent is thin | Improve coverage or restructure first |
| Under about 6 months of ownership | Wait, or ask about cost-basis limits |
Honestly, the rent-limited case is the toss-up. You can wait on lease-up or rent increases, pay down the first mortgage with other funds, or ask a select lender about a below-1.00 path with leverage and terms adjusted. Each costs something. Waiting costs time, paying down costs liquidity, and the adjusted path costs terms.
Three common mistakes are worth avoiding. First, assuming the 75% cap limits your cash rather than the loan. The payoff, costs, and first mortgage come out of that cap before you see a dollar. Second, assuming a payoff-only file is automatically rate-and-term. Cash back beyond payoff and costs changes the label. Third, treating a signed-later note as equal to one made when the money moved.
The complete DSCR loans guide walks through the broader qualification picture.
Frequently Asked Questions
Can a cash-out refinance repay my parents or a relative at closing?
Generally yes, when the debt is documented and the payoff amount is fixed in writing. The title company wires the payoff, and a recorded lien gets released. The amount repaid is limited by the new loan size, not by any special family-loan rule.
Is paying off a family note a rate-and-term or cash-out refinance?
It depends on whether cash comes back. If the new loan covers only the first mortgage, the family note, and closing costs, it may be treated as rate-and-term. Cash beyond that makes it a cash-out, with the 75% ceiling on a standard rental and about 6 months of seasoning. The lender makes the final call.
What if the equity is there but the rent is too thin?
Then rent coverage sets the limit. Coverage must clear on the larger balance, and 1.00 is where many select programs start. Clearing coverage is also not the same as positive cash flow, so budget for repairs, vacancy, and management separately.
Does an unrecorded family loan block the refinance?
Not automatically, but it adds friction. With no lien, title has nothing to release, yet the lender still wants proof the debt exists and what is owed. Bank transfers, a signed note, and a payoff letter all help. Tell your broker early so the file is built around the gap.
What if the proceeds cannot cover the whole family balance?
Repay the portion the loan supports and agree on revised terms for the rest, or wait and improve rent coverage or reduce the first mortgage with other funds. Whether a remaining family debt can stay secured against the property depends on the lender, since the new loan generally needs first position.
Next Step
If you are buying or refinancing a rental property and want to see how the numbers work, Lendmire can help you compare DSCR loan options based on the property income, credit profile, leverage, and investor goals. Lendmire is a mortgage broker arranging financing through select lenders in its wholesale network across 41 markets, including Washington, D.C. Program terms change, every file is underwritten individually, and nothing here is a commitment to lend.
For the mechanics of pulling equity out of a rental property, see Lendmire’s guide to cash-out refinance on an investment property.
About Lendmire
Lendmire, NMLS# 2371349, is a mortgage brokerage focused on investor financing, arranging DSCR loans in 40 states plus Washington, D.C. — 41 markets total. Qualification is based on the property’s income rather than personal income documentation, subject to lender guidelines, making it a fit for LLC-held rentals and scaling portfolios. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Fannie Mae Selling Guide, Cash-Out Refinance Transactions
2. CFPB, Regulation Z Section 1026.3
This article is part of Lendmire’s investment property cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How Much Can You Borrow With a DSCR Cash-Out Refinance on a Rental That Needs Repairs? · Can You Get a DSCR Cash-Out Refinance to Renovate a Rental Property? · Portfolio DSCR Cash-Out Refinance to Know How Much Equity a Rental Needs: The 2026 Guide
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.