The Quick Read: The underwriter treats a private note as a debt to prove, size, pay and release. Then the file is judged like any FHA cash-out. The home must be owned and lived in for 12 months, and the whole new loan must fit within 80% of the home’s value. Three things shape the review: the equity left after the payoff, the paper trail on the note, and your credit and income. Everything below is subject to lender guidelines and full file review, and nothing here is a commitment to lend.
Key Takeaways
- A private note is a loan from a person or business, not a bank, that is secured by your home.
- On a standard FHA cash-out, the new loan can reach 80% of the home’s value, and that limit covers the payoff, the financed upfront premium and the closing costs.
- You generally need to have owned and lived in the home for 12 months before the FHA case number is assigned.
- Because a private note rarely shows on a credit report, the lender builds the payment history from other documents.
- A cooperative note holder who provides a clean payoff letter and lien release makes the file far easier to document.
What Is a Private Note, and Why Does It Complicate the File?
A private note is a loan secured by your home that came from an individual, a family member, a seller who carried financing, or a small business. There is no servicer, no monthly statement system and usually no credit-bureau reporting. That is exactly why underwriters handle it differently.
FHA cash-out estimate
Seeded with an example value, a balance to match, and a round cash request; change any field.
Editable benchmark: 7.18% as of November 5, 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.
A bank mortgage arrives with a payoff statement, a payment history and a recorded lien that title can see in one place. A private note might have a handwritten agreement and payments by check or transfer. It might also have an unrecorded lien, or a balloon payment coming due.
Here is a distinction that matters. A no-cash-out refinance is limited to paying off existing debt and covering costs. A cash-out refinance has no such limit on what the proceeds do. Whether a given private-note payoff counts as one or the other depends on how the lender classifies the lien. The lender makes that call. Nobody should promise you the lighter treatment before the file is reviewed.
Because that classification is not settled until review, prepare for the cash-out rules, even if you expect to walk away with little or no cash. Preparing for the stricter rules from the start leaves fewer surprises once the lender reviews the file.
How Does the Underwriter Work Through the File?
The underwriter goes in a fixed order: eligibility first, then the note, the payoff, the appraisal and loan size, your ratios, and finally the closing conditions. If any early step fails, the later ones never matter. Knowing the order tells you where to prepare.
Step 1: Eligibility, occupancy and ownership
A standard FHA cash-out is for a principal residence. Across the programs Lendmire arranges, the home must be one you have owned and occupied for 12 months before the case number is assigned. A non-occupant co-borrower can help on an FHA purchase, but that person’s income generally cannot be used to qualify you on a cash-out.
This step can rule out borrowers early. Suppose you bought a home with a seller-carried note and want to refinance it in a few months. The clock has not run. A second home or a rental is not a standard FHA cash-out at all. Occupancy sets the leverage, and for a home you live in the cash-out limit is 80%.
Step 2: Classify the lien
Next, the underwriter asks what the private note actually is. A purchase-money seller carryback, a loan that funded a renovation, a family loan and a personal or business loan all look different on paper. The lender reads the note, the deed of trust or mortgage that secures it, and the title report to see whether the lien is recorded.
The classification drives the treatment. It also affects how the payoff is labeled on your Closing Disclosure. If the lender cannot clearly classify the debt, the file stalls here. Hand over the full note and every amendment up front.
Step 3: Verify payment history
For a bank loan, the lender pulls a history. For a private note, the lender typically documents it another way: a written verification of the loan from the note holder, bank statements or cancelled checks showing payments, or a combination. Lenders generally want to see payments made on time for the previous 12 months, though the exact documentation varies by lender.
Those standards are lender-level practice, not a rule you can look up in one place. Expect the underwriter to want proof that matches the note’s own terms.
If you have been paying a relative in cash, fix that before you apply. Start paying by traceable transfer and keep the record.
Step 4: Obtain the payoff statement
The lender needs a current payoff statement for the debt being paid. For a private note, a useful payoff letter shows:
- the unpaid principal balance
- accrued interest, and the daily amount it grows
- any fees or late charges the note holder claims
- how and when the lien will be released after payment
Get this in writing from the note holder. A verbal number does not work. Title uses the letter to wire the exact payoff at closing, and the lender uses it to size your loan.
Step 5: Appraisal and loan sizing
An FHA-approved appraiser sets the home’s value. The cash-out cap applies to what FHA calls Adjusted Value. HUD Mortgagee Letter 2019-11 cut the maximum loan-to-value and combined loan-to-value on cash-out refinances to 80%, down from 85%. HUD’s own announcement confirms the change, and HUD explained the cut as strengthening the equity position on these loans.
The 80% limit is not a cap on the cash you receive. It is a cap on the whole new loan. That loan includes the private-note payoff, the financed upfront premium and any financed costs. Whatever room is left after those items is the most cash that could come to you.
Step 6: Credit, income and ratios
Now the file is run through FHA’s automated underwriting, with manual underwriting as the fallback. Credit, income, assets and debt ratios are all reviewed. The base ratio pair is 31/43, meaning housing costs and total debts as a percentage of income, and it applies when the file has no compensating factors. Documented compensating factors can raise the limits to 40/50 at the top tier, and the automated finding governs most files.
Your existing payments on the note may count as monthly debt today. After payoff they disappear and are replaced by a single FHA payment, so your ratios can look different on the new loan than they do now. Lenders work this out file by file.
The wholesale programs Lendmire uses to place FHA loans generally start at a 580 decision score. Some lenders set a higher floor, so a score that works at one may not work at another.
Step 7: Conditions and closing
Before closing, the underwriter issues conditions: the signed payoff letter, title clearing, proof of insurance and any missing history. The new FHA loan must be the first lien. At closing, title pays the note holder from the loan proceeds. The note holder then records a release of the lien, and the old claim on your home is gone.
Your Closing Disclosure shows the payoff, the closing costs financed from the loan amount, and any cash to you. The CFPB’s home loan toolkit explains how to compare that document line by line against your Loan Estimate. Do that comparison. It is the best defense against surprises.
How Different Private Notes Get Treated
The table below shows how a lender typically reads each kind of note. It is a pattern, not a rule, and lender overlays vary.
| Note type | Typical treatment | Main risk flag |
|---|---|---|
| Seller carryback | Review of original sale and note terms | Too recent for the 12-month clock |
| Family loan | Needs written note and proof of payments | Informal or cash payments |
| Renovation or business loan | Lien classified by how it was used | Unclear paper trail |
| Unrecorded private lien | Title must confirm and clear it | Surprises on the title report |
| Balloon note near maturity | Payoff still documented as usual | Pressure to close on a deadline |
A Worked Example (Modeled, With Percentages Only)
Picture a homeowner who has lived in the house for several years. A private note secured by the home equals roughly 60% of the appraised value. Say the upfront premium of 1.75% of the base loan is financed, plus closing costs of a few percent of the loan.
Add those together. The new loan lands near the mid-60s as a percentage of value, comfortably inside the 80% cap. The gap between that figure and 80% is the room available for cash back, if the borrower wants any.
Change one input. Say the note equals 75% of the value. The premium and costs push the total close to or past the cap. The lender would have to shrink the costs financed, ask you to bring cash to closing, or tell you the loan cannot close as structured. These inputs are modeled assumptions, not market data. The point is the shape: the bigger the note relative to value, the thinner the margin.
What Does Mortgage Insurance Do to the Numbers?
FHA charges two kinds of mortgage insurance, and both affect your sizing. The upfront premium is 1.75% of the base loan and is typically financed into the loan, which means it sits inside that 80% cap. HUD’s premium schedule sets the structure.
The annual premium runs between 0.15% and 0.75% of the balance, depending on the term, the loan amount and the LTV. It is billed monthly. On a thirty-year loan at or below 90% LTV, the annual premium ends after eleven years. Above 90%, it lasts for the term. Since a cash-out tops out at 80%, the shorter schedule is the one that generally applies to this type of loan, subject to lender guidelines.
These are program mechanics, not advertised prices. Your actual cost shows on your Loan Estimate.
Where Files Get Stuck
The equity is too thin. If the payoff, the financed premium and the costs together exceed 80% of value, the loan does not work as structured. A simple test before applying will catch this.
The note holder will not cooperate. The lien must be documented and released. A holder who delays a payoff letter or a release stalls everything. This is a human problem, not a paperwork one. Talk to the holder early, explain what the lender needs, and give them a clear request.
The history cannot be proven. Missing statements, cash payments and handshake arrangements leave the underwriter with nothing to verify. A lender may offer another path, but you should not count on one.
The home was bought too recently. The 12-month ownership and occupancy test generally blocks a standard cash-out soon after purchase. Some lenders add their own waiting periods on top of the FHA minimum.
The lien is misclassified. If you assume the payoff gets lighter treatment and the lender classifies it as cash-out, your loan size and timing change. Ask how the lender will classify it before you commit.
One more small thing: a streamline refinance sounds tempting, but it applies only to an existing FHA loan and cannot produce cash. It cannot pay off a private note.
Edge Cases Worth Knowing
A few situations break the usual pattern.
A non-occupant co-borrower cannot help you qualify on a cash-out, even though one can help on an FHA purchase. If your income alone does not carry the ratios, this is the point where a family member cannot step in.
A second home or rental is not eligible for a standard FHA cash-out. Occupancy decides the leverage, so the home must be your principal residence.
Subordination is sometimes discussed as an alternative: the note holder agrees to stay in place behind the new loan. That is a practitioner workaround, and the new FHA loan must still be the first lien. Ask a lender whether it is workable for your scenario.
A recent credit event has its own waiting periods. Those are HUD’s rules, not a promise from any lender.
Alternatives to Consider
An FHA cash-out is not the only way out of a private note. The right choice depends on your equity, credit and how much time the note gives you.
| Option | What it does | Tradeoff |
|---|---|---|
| FHA cash-out refinance | One new first-lien loan pays the note | Mortgage insurance; 80% cap |
| Home equity line | Borrow against equity, keep your first loan | Adds a second lien and a variable structure |
| Keep and renegotiate the note | Extend the term or change payments | Depends on the holder’s willingness |
| Pay down from savings | Reduces the balance directly | Uses cash you may need |
Key Terms Defined
Private note: A loan secured by your home that comes from a person or business rather than a bank.
Cash-out refinance: A new mortgage that replaces your current loan or lien and is not limited to paying off specific debts.
Adjusted Value: The value FHA uses, based on the appraisal, to measure your loan against the cap.
Upfront mortgage insurance premium: A one-time FHA charge of 1.75% of the base loan, usually financed into the loan.
Payoff statement: A written letter from the note holder showing the exact amount needed to retire the debt.
Lien release: A recorded document confirming that the note holder no longer has a claim on your home.
What Your Decision Looks Like in Practice
Start with the question the underwriter will ask first: is there enough equity? Estimate the payoff, add the financed premium and a few percent for costs, and compare that total against 80% of your home’s likely value. If it clears, move on. If it does not, no amount of good credit fixes it.
Next, gather the paper. That means the note and any amendments, proof of 12 months of payments, a payoff letter request to the holder, and proof you have owned and lived in the home for 12 months. Having these ready lets a broker match your file to a lender whose requirements fit, because overlays differ between lenders. Lendmire is a mortgage broker, so the work is comparing wholesale lenders and matching the scenario to the program, not lending itself. The best program for your situation depends on your equity, credit, documentation and the note’s terms.
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.
Frequently Asked Questions
Does paying off a private note count as a cash-out refinance even if I get no cash?
Often it does. The lender classifies the lien under FHA’s rules, and a non-purchase-money private lien can fall on the cash-out side. A lender makes that call after reviewing the note and title. Do not assume lighter treatment until it is confirmed.
How does a lender verify payments on a note that is not on my credit report?
Typically through a written verification from the note holder, bank statements, cancelled checks, or a mix of these. Lenders generally want a clean record for the previous 12 months. Traceable payments are far easier to document than cash.
What is the most I can borrow?
On a standard FHA cash-out, the whole new loan can reach 80% of the home’s Adjusted Value. That includes the payoff, the financed upfront premium and any financed costs. Only what remains inside the cap can come to you as cash.
Can I use an FHA streamline to pay off the note instead?
No. A streamline refinances an existing FHA loan only and cannot produce cash. A private note is not an FHA loan, so a standard cash-out or another structure is needed.
What if the note holder will not provide a payoff letter or release?
The loan generally cannot close until the payoff is documented and the lien can be released. Talk to the holder early and put the request in writing. If cooperation is unlikely, ask about alternatives such as subordination or a different program.
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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Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. HUD Mortgagee Letter 2019-11
2. HUD press release on the cash-out LTV change
3. CFPB Your Home Loan Toolkit
4. HUD Mortgagee Letter 2023-05 on mortgage insurance premiums
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: How Lenders Underwrite an FHA Cash-Out Refinance to Pay College Tuition · How Lenders Underwrite an FHA Cash-Out Refinance Versus Conventional Cash-Out Limits · How Lenders Underwrite an FHA Cash-Out Refinance When the 30-Year Term Starts Over
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
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.