The Quick Read: A new mortgage can pay off a loan from a relative, but only when clear paper proves the debt and the closing table pays the relative directly. Most of the time the payoff counts as a cash-out refinance. The exception is a note secured by a recorded lien that funded the purchase of the home in its entirety. Either way, the lender wants the note, the payment history and a payoff statement in the file.
Key Takeaways
- The two questions that decide everything: is the note secured by a recorded lien, and what did the money originally pay for?
- A secured note used entirely to buy the home may fit a rate-and-term (limited cash-out) refinance. Anything else usually falls under cash-out rules.
- A handshake loan or a text-message loan is hard to use. Lenders want a signed note and proof the money moved.
- The new loan has to be a regular amortizing mortgage, and you have to qualify on its full payment.
- Start before the due date. Lien releases and seasoning rules take time you cannot compress.
What “Coming Due” Means for a Family Loan
A family loan “comes due” when its maturity date arrives, when a balloon payment is owed, or when the relative demands repayment on a demand note. A balloon is a large lump sum owed at the end of a loan that was paid down only a little along the way. Many family notes are interest-only or pay nothing until maturity. That is why the end date hits so hard.
If the balance is not paid, the relative can treat the note as in default. If the note is secured by a lien on your home, that can put the property at risk. An unsecured note is a legal debt but does not sit on the title.
A refinance solves this by replacing the family note with a new first mortgage. The title company pays your relative from the loan proceeds. Lendmire’s cash-out refinance programs are built for this kind of equity use, and the lender classifies the file based on how the family loan began.
Here is the honest limit: the agency guides do not name a “family loan” category. They sort debts by whether a lien secured them and what the money bought. So how your note is treated depends on lender and automated-underwriting review. Anyone who gives you a flat answer before seeing the paper is guessing.
What Are Your Options When the Date Is Near?
You have five realistic exits. A refinance is one of them, and not always the best one.
| Option | Best fit | What you need | Main risk |
|---|---|---|---|
| Cash-out refinance | Enough equity, solid income | Note, payoff statement, full application | Higher payment, cash-out limits |
| Pay from savings | Cash on hand | Payoff letter | Drains reserves |
| Sell the home | Equity matters more than the house | A listing and a buyer | You lose the home |
| Extend or modify | Relative is willing | Signed written amendment | Only delays the problem |
| Partial paydown plus extension | Some cash, relative agrees | Amendment and receipts | Still a balloon later |
If you keep the home and the relative will not extend, a refinance is the usual path. If the relative will extend, ask yourself whether you can qualify any better later. Delay only helps when your income, credit or equity will improve.
How a Cash-Out Refinance Retires a Family Loan
The process runs in a set order. Knowing it lets you gather paper before the lender asks.
1. Pull the note. Collect the signed promissory note, the original amount, the maturity date and every payment record.
2. Check for a lien. Find out whether a deed of trust or mortgage was recorded against your home. Your title search will show it.
3. Apply and disclose the debt. Tell the loan officer about the family note up front. Surprises in underwriting cost time.
4. Classify the loan. The lender decides whether the payoff fits a rate-and-term refinance or must be a cash-out refinance.
5. Order the appraisal. Value sets how much you can borrow, based on the loan-to-value (LTV) limits below.
6. Get a payoff statement from your relative. It states the exact balance, including interest, through the closing date.
7. Close. The closing agent pays your relative from proceeds. If a lien exists, a written release is recorded. The Closing Disclosure shows the payoff line.
On a conventional cash-out refinance of a one-unit primary residence, the wholesale programs Lendmire places files with generally reach 80% LTV. They reach 75% on two- to four-unit primary homes and on second homes. Loan-to-value is the new loan amount divided by the appraised value. Those limits are subject to lender guidelines and full file review.
Secured, Unsecured or Informal: What Changes
The type of note decides which rules apply. This is the part most borrowers miss.
| Note type | Typical classification | What the file needs |
|---|---|---|
| Secured, used entirely for the purchase | May fit rate-and-term (limited cash-out) | Recorded lien, settlement statement or title policy |
| Secured, used for anything else | Generally cash-out | Note, lien documents, payoff statement |
| Unsecured | Generally cash-out | Note, proof of funds, payment history |
| Informal or verbal | Hard to use | Written note signed now, with proof of transfers |
On the secured, purchase-only path, Fannie Mae’s rule is narrow. Its limited cash-out guide says only subordinate liens used to purchase the property may be paid off and included in the new mortgage. You prove it with the purchase settlement statement or a title policy from the purchase that identifies the subordinate financing. Freddie Mac’s no cash-out guide adds a key phrase: the junior lien must have been used “in their entirety” to buy the home. A family loan that covered part of the price and part of a renovation fails that test.
Why does classification matter? Cash-out transactions are priced higher than limited cash-out ones. You also get a lower LTV ceiling. The refinance reaches 95% LTV on a one-unit primary residence, against 80% for cash-out. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
The cash-out path is simpler on the family-loan question. Fannie Mae’s cash-out guide lists paying off subordinate liens of any age and taking equity out for any purpose as acceptable uses. That language is why an unsecured family note paid from proceeds points toward cash-out.
What Goes in the Documentation File?
Think of the file as the answer to one question from the underwriter: is this debt real, and is the payoff amount right?
| Document | What it proves | Who supplies it | Common problem |
|---|---|---|---|
| Signed promissory note | The debt exists and its terms | You or your relative | Missing or unsigned |
| Payment history | Payments were actually made | Your bank records | Cash payments with no receipts |
| Proof of the original transfer | Where the money came from | Bank statements | Funds moved between accounts years ago |
| Payoff statement | The exact amount owed at closing | Your relative | Interest left out |
| Lien documents | Whether the debt is on title | Title company | Lien never recorded, or recorded wrong |
| Amendments or extensions | The current terms | You and your relative | Changes agreed verbally |
| Relative’s ID and contact details | Who gets paid | Your relative | Title company cannot reach them |
For a secured note used to buy the home, add the purchase settlement statement or the title policy. That is the paper the agency rule asks for.
The Payoff Statement: What It Must Show
The payoff statement is a short written letter from your relative. It tells the closing agent exactly how much to wire and where.
It should show:
- The loan’s principal balance.
- Interest accrued to the closing date, plus a per-diem figure. Per diem is the interest that adds up each day, so the amount can adjust if closing shifts.
- Where to send the funds, and the name on the receiving account.
- A statement that the payment satisfies the debt in full once received.
- The relative’s signature.
If a recorded lien exists, your relative also signs a release or satisfaction. The title company handles recording it. Do not let the relative accept a discounted amount without thought. Forgiven interest or principal can raise questions beyond the mortgage. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
A Worked Example
Here is a modeled picture in percentages of home value, with no dollar figures. These inputs are assumptions, not market data.
Say your home appraises at 100% of value. You owe 40% of value on your first mortgage. You owe your parent a family note equal to 10% of value, due soon.
- Existing first mortgage: 40% of value.
- Family note payoff: 10% of value.
- Closing costs: a small additional percentage.
- Total new loan: roughly 50% of value plus costs.
That sits far below the 80% cap for a one-unit primary residence. The deal works on leverage. The question then becomes the payment. A note that was interest-only now becomes a fully amortizing mortgage payment on a bigger balance. Your total debt-to-income ratio is measured on that new payment. The wholesale programs set a total ratio ceiling of 50% on automated findings, with lower ceilings on manually underwritten files.
Also note the 12-month seasoning rule. The first mortgage being paid off must generally be at least 12 months old, measured note date to note date. Fannie Mae says that test does not apply to subordinate liens being paid off. You also need to have been on title for six months, with exceptions for delayed financing, inheritance and legal awards.
Where the Rule Breaks
These are the edge cases that derail a file.
Partial-purpose notes. A family loan that paid for the down payment and the new roof does not meet the “entirely for the purchase” test. Plan on cash-out treatment.
FHA and VA streamlines. An FHA Streamline needs an existing FHA loan that is current. HUD’s streamline page says it also limits cash taken out to a token amount. A VA IRRRL can only pay the existing VA loan and its own costs. Neither can pay a relative. You would need a full FHA or VA cash-out refinance, with underwriting and an appraisal.
Balloon on the new loan. The new mortgage should not itself be a balloon loan. Federal ability-to-repay rules require the lender to consider and verify your income or assets and debts. The CFPB’s compliance guide explains that standard. A family note’s balloon does not get a pass, and the lender will not waive income checks because the debt is to a relative.
Land contracts. If a family member sold you the home on an installment land contract, the treatment depends on how old the contract is, and some payoffs are ineligible for cash-out. Have the lender confirm before you plan around it.
Relative holds a note, not title. A co-owner buyout under a legal agreement gets special seasoning treatment. A relative who only holds your note is not a co-owner.
Non-arm’s-length purchases. If you bought the home from a relative, expect extra scrutiny of the original transaction.
Second home. Occupancy decides leverage. A second home caps at 75% LTV on a cash-out, below a primary residence. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.
Missing or unsigned note. Sign one now, dated truthfully as a confirmation of the existing debt, and gather bank records showing the original transfer. Some lenders will not use a paper created at the last minute. Ask early.
Deceased relative. The estate holds the debt. The payoff statement comes from the estate’s representative, and the title company will want proof of their authority.
Disputed balance. If you and your relative disagree on the number, settle it in writing before applying. A closing cannot proceed on two figures.
Talking to Your Relative
Open the conversation before the due date, not after. Tell your relative you plan to refinance and explain that they will be paid from the closing table. Ask for the payoff statement early and ask them to confirm the per-diem interest. Keep both sets of records identical.
If they will not cooperate, or you are asking for a discount, expect delays. Get any agreement to accept less than the full balance in writing, and talk to a tax professional first.
Timeline Checklist: Working Backward From the Due Date
The order matters more than any day count.
1. Locate the note, the lien documents and the payment records.
2. Talk with your relative about the payoff plan.
3. Speak with a loan officer about classification, equity and qualifying payment.
4. Submit your application and disclose the family note.
5. Complete the appraisal and respond to underwriting requests.
6. Collect the payoff statement and any lien release.
7. Review the Closing Disclosure and confirm the payoff line matches the statement.
8. Close, and confirm the release is recorded.
If the due date is close, ask your relative about a short written extension at the same time you apply. It can protect you if the closing slips.
When a Refinance May Not Work
A refinance can fail on equity, income or title. If the new loan would exceed the LTV limit, you may need to pay part of the note from savings and extend the rest. If the new payment pushes your debt ratio too high, a longer term or a smaller loan may help. If your credit has slipped below the program floor (the wholesale conventional programs start at a 620 decision score), repairing credit may come first.
Higher debt ratios can also trigger a reserve requirement on cash-out files. Reserves are money left in your accounts after closing. Ask your loan officer how much applies to your case. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.
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. Program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.
Key Terms Defined
Balloon payment: A large lump sum due at the end of a loan after small or no payments along the way.
Cash-out refinance: A new mortgage larger than the one it replaces, where proceeds can pay other debts or go to you.
Limited cash-out (rate-and-term) refinance: A new mortgage that pays off the existing first loan, closing costs and, in narrow cases, a purchase-money second lien, with only incidental cash back.
Lien release: A recorded document showing a secured debt was paid and no longer claims the home.
Payoff statement: A written statement from the lender of the exact amount needed to settle a debt on a given date.
Per diem: The daily interest that builds up between a statement date and the closing date.
Seasoning: The waiting period a loan or ownership must meet before a refinance is allowed.
Frequently Asked Questions
Can I use a rate-and-term refinance instead of a cash-out to pay my family loan?
Only in a narrow case. The family loan must have been secured by a recorded lien and used entirely to buy the home. You then document it with the purchase settlement statement or a title policy. Otherwise the payoff generally falls under cash-out rules.
Does the family loan have to be recorded against my home?
It does not need to be for a cash-out refinance, because any outstanding debt can be paid from proceeds. Recording matters for classification, because the rate-and-term path requires a lien. If a lien was recorded, it must be released at closing.
What if my relative never signed a note?
Sign one that confirms the existing terms, then back it with bank records of the original transfer and any payments. Some lenders will not rely on a document created at the last minute. Raise it with your loan officer before applying.
Can an FHA Streamline or VA IRRRL pay off a family loan?
No. Both are built to pay off the existing government-backed loan and little else.
Will the lender skip income checks because I am paying off family debt?
No. The lender must still consider and verify your income or assets and your debts. You are qualifying for the new payment on the larger loan, not the old family note.
For your own numbers, request a scenario review with Lendmire.
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.
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References
1. Fannie Mae Selling Guide B2-1.3-02: Limited Cash-Out Refinance Transactions
2. Freddie Mac Guide 4301.4: No Cash-Out Refinance Mortgages
3. Fannie Mae Selling Guide B2-1.3-03: Cash-Out Refinance Transactions
4. HUD: FHA Single Family Streamline Refinance
5. CFPB Ability-to-Repay and Qualified Mortgage Rule Compliance Guide
This article is part of Lendmire’s Refinance series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: Can a Cash-Out Refinance Pay Off a Money Partner Note Coming Due? · Cash Out Refinance Investments · Cash Out Refinance Duplex Home
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.