The Quick Read: Yes, usually, but only as a cash-out refinance, not a rate-and-term one. Agency rules let a rate-and-term loan retire only the existing first mortgage and a second lien that was used to buy the home. A private or family note taken after purchase, or one with no lien at all, makes the new loan cash-out. Cash-out carries lower leverage caps, seasoning rules, and a bigger payment tied to your home.
Why a Rate-and-Term Loan Usually Can’t Do It
A rate-and-term refinance replaces what you owe on the home and nothing more. Fannie Mae’s rules for limited cash-out refinances say that only subordinate liens used to purchase the property may be paid off and rolled into the new mortgage. A second lien is a loan recorded behind your first mortgage.
Cash back is capped too. Under Fannie Mae’s announcement on limited cash-out loans, cash to the borrower may not exceed the lesser of 1% of the new loan balance or $2,000. That is far too small to retire most family or private notes.
One honest caveat. The agency text never uses the phrases “private note” or “family loan.” Treating the payoff as cash-out is how the rules apply, not a line you can quote. Across the wholesale programs I place files with, the classification works the same way: if the debt wasn’t used to buy the home, it is cash-out.
Which Bucket Is Your Note In?
Two questions decide the answer. Did the note finance your purchase? Is there a recorded lien on the home?
| Your situation | Loan type needed | Main catch |
|---|---|---|
| Secured note that financed the purchase | Rate-and-term can work | Document that it was used to buy the home |
| Secured note taken after purchase | Cash-out | Title evidence and payoff statement |
| Unsecured note, no lien | Cash-out | Written payoff or release letter |
A secured purchase-money note. Picture a seller who carried back a second loan when you bought, or a relative who funded a second lien at purchase. A lender can pay that off in a limited cash-out refinance, as long as the file proves the lien was used to acquire the home.
A secured note taken later. Say a parent lent you money for repairs two years after closing and recorded a lien. Paying it off makes the refinance cash-out.
An unsecured note. A handshake loan or a signed promissory note with no lien has nothing to “pay off” on title. Still, the money is coming out of your equity and going to the lender, so it is cash-out. The payoff shows up as a line on your Closing Disclosure.
How the Payoff Works, Step by Step
1. The lender classifies the loan. A cash-out refinance, per Fannie Mae, can pay off subordinate liens of any age and take equity out for any purpose.
2. You document the note. A secured note needs a payoff statement and title evidence of the lien. An unsecured note needs a written payoff or release letter from the holder. That letter is closing practice, not an agency rule, but expect to be asked for it.
3. The appraisal sets the ceiling. The new loan, including the note payoff and any cash to you, must fit under the cash-out leverage cap against the appraised value.
4. Closing. The title or closing agent pays your relative or private lender directly. That is the cleanest proof the debt is gone.
5. Release. A secured lender records a lien release. An unsecured holder signs the release letter. Keep copies.
A relative may not know what a payoff statement is. Title or escrow can usually supply a form. Ask early, because the number has to be good through the closing date and include interest up to payoff, not just the last balance you remember.
What the Cash-Out Limits Look Like
Across the wholesale programs I arrange, conventional cash-out refinances run to 80% LTV on a one-unit primary residence. That drops to 75% on two- to four-unit primary residences. LTV, or loan-to-value, is your new loan divided by the home’s appraised value. Everything must fit inside that cap: the note payoff, the old first mortgage, financed closing costs, and any cash you take. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
Here is a scenario in percentages. Say the family note is 30% of the home’s value. If the note alone takes 30% and the first mortgage is large, you can reach the cap before costs are even counted. Net proceeds must cover the payoff. If they fall short, you bring cash, negotiate with the holder, or choose another route. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.
A separate wholesale lane reaches 89.99% LTV with no mortgage insurance. It requires a 680 score, a 50% ratio, a thirty-year fixed rate, a primary residence, a conforming balance, and its own six months of seasoning. It is not written in Texas, where state law caps cash-out on a homestead. Eligibility is subject to lender guidelines and full file review.
Seasoning and Ownership Rules
Seasoning is the waiting period a lender wants before you can cash out. Conventional cash-out refinances require two things:
- The first mortgage being paid off must be at least 12 months old, measured note date to note date.
- At least one borrower must be on title for six months before the loan funds.
Exceptions exist for delayed financing, inheritance, and legal awards such as a divorce decree. Delayed financing is for someone who bought with cash and wants to recover it. The new loan is limited to the documented initial investment plus financed costs. If your cash itself came from an unsecured loan, expect extra documentation, and confirm the details with your loan officer.
Fannie Mae also allows a title exception when you are financially obligated on the loan being paid off but are not on title. That matters when a relative holds title to a home you are actually paying for.
Will the Family Note Hurt Your Debt Ratios?
Possibly, and it depends on paperwork. Your debt-to-income ratio, or DTI, compares monthly debt payments with monthly income. Fannie Mae counts installment debts in the ratio, and a family loan with a written payment schedule may need to be counted.
The payoff helps, as long as it is documented and paid at closing. Under Fannie Mae’s rule on debts paid at or before closing, an installment loan paid down to ten or fewer remaining payments does not have to be counted. The new, larger mortgage payment replaces your old housing payment.
On automated-underwriting files, Fannie Mae requires six months of reserves for cash-out when DTI is above 45%. Reserves are money left in the bank after closing. The wholesale programs I work with generally allow a total ratio up to 50% on an automated approval. Manually underwritten files run tighter, at 36% or 45% depending on score and reserves.
Don’t assume the note stays hidden because it isn’t on your credit report. A title search, a recorded lien, bank statements, or a payment schedule can surface it. Disclose it up front.
What Can Block the Deal
- Seasoning. The first mortgage is under 12 months old, or no borrower has held title for six months.
- An appraisal shortfall. Value comes in low and the payoff no longer fits under the cap.
- No paper trail. An unrecorded note with no written terms is hard to document.
- A gift versus loan dispute. If the family member calls it a gift but your records say loan, or the reverse, the file stalls.
- An installment land contract. Fannie Mae’s limited cash-out rules allow paying one off if it was executed more than 12 months before the application date. Older versions of the standard cash-out guide listed such payoffs as ineligible, so confirm current treatment with your loan officer.
- A below-market seller carry-back. Seller financing priced well under market can be treated as a sales concession rather than ordinary subordinate financing. Ask before assuming it counts as a purchase-money lien.
- Occupancy. On a primary-residence loan, every borrower must actually live in the home.
Government Loans: FHA and VA
Streamlines won’t work here. The FHA Streamline requires an existing FHA loan, and cash above $500 may not be taken out. The VA IRRRL replaces an existing VA loan and allows no cash back. Neither can pay a family note.
FHA treats a refinance as cash-out when proceeds aren’t limited to paying existing mortgage liens and transaction costs. So a private note that is unsecured, or secured but not purchase-related, pushes an FHA refinance into cash-out. Paying a private note with a VA loan needs a VA cash-out refinance. VA rules should be verified against VA.gov before you rely on them, and details vary by program.
Your Options Compared
| Option | What it does | Tradeoff |
|---|---|---|
| Pay from savings | Retires the note, no new debt | Drains cash |
| Extend with the holder | Keeps the loan informal | Doesn’t remove the maturity problem |
| Home equity loan or line | Adds a second payment | Keeps your first mortgage as is |
| Cash-out refinance | Replaces everything with one new first mortgage | Resets the loan, lower leverage cap |
Pricing on cash-out refinances includes adjustments that depend on credit score and LTV. The details show up on your Loan Estimate, so compare the whole loan, not just the payoff.
The Family Side of the Math
Moving an informal loan into your mortgage changes its nature. A flexible family arrangement becomes a fixed, enforceable payment on a lien against your home. The CFPB’s research on cash-out refinances notes that converting non-mortgage debt into mortgage debt can put the home at risk of foreclosure. That is worth weighing. A relative who would have waited patiently has been replaced by a servicer who won’t.
Practical steps help:
- Get a written payoff or release letter from your relative.
- Ask the holder for the exact payoff figure and its good-through date.
- Make sure the payoff fits inside your net cash after closing costs and financed fees.
- Expect the payoff to appear on your Closing Disclosure as a money transfer.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit. That covers the interest your relative earns and any question about gifts.
Key Terms Defined
Cash-out refinance: a new mortgage larger than your current payoff, where the difference goes to you or to other debts.
Rate-and-term refinance: a refinance that replaces your existing loan, with only incidental cash back.
Subordinate lien: a loan recorded behind your first mortgage, such as a second mortgage.
Payoff statement: a document showing the exact amount to retire a debt on a specific date, including accrued interest.
Seasoning: the waiting period required before you can refinance or take cash out.
LTV: loan-to-value, the loan balance as a percentage of the home’s appraised value.
Frequently Asked Questions
Can I use a cash-out refinance to pay off an unsecured family loan?
Yes, in most cases. With no lien, the payoff is simply cash out of your equity that goes to your relative at closing. Expect to provide a written payoff or release letter, and the loan must fit under the cash-out leverage cap. Eligibility is subject to lender guidelines.
Does it matter whether the family loan helped me buy the home?
It matters a great deal. A secured loan used to buy the property can be paid off in a limited cash-out refinance with a rate-and-term structure. A loan taken after purchase makes the refinance cash-out. Your file needs written proof of how the money was used.
How long must I own the home before I can do this?
For a conventional cash-out, at least one borrower must be on title for six months, and the first mortgage being paid off must be at least 12 months old. Exceptions include delayed financing, inheritance, and legal awards. Your loan officer can tell you which applies.
Will the family note count against my debt-to-income ratio?
It can if there is a written payment schedule, since installment debts are counted. If the note is paid off at closing and documented, it generally drops out, and the new mortgage payment replaces your old housing payment. The final read comes from underwriting.
Can an FHA Streamline or VA IRRRL pay off a private note?
No. The FHA Streamline limits cash to $500 and requires an existing FHA loan. The VA IRRRL allows no cash back. A private note payoff would need an FHA or VA cash-out refinance, if you qualify.
What to Do Next
Start with the paperwork: the note, any recorded lien, and a payoff figure from the holder. Then check your equity against the cash-out cap, and ask whether seasoning applies. 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. The brokerage’s cash-out refinance programs page lays out the options. Nothing here is a commitment to lend, and every figure is subject to lender guidelines and a full file review.
For your own numbers, request a scenario review with Lendmire.
For current guidelines and terms, see Lendmire’s refinance programs page.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage broker licensed for consumer lending in 16 states. Lendmire arranges FHA, VA, conventional and jumbo purchase and refinance loans through wholesale lenders; every file is underwritten by the lender under the applicable program guidelines. 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. Fannie Mae SEL-2025-08 Announcement
3. Fannie Mae Selling Guide B2-1.3-03, Cash-Out Refinance Transactions
4. Fannie Mae Selling Guide B3-6-05, Monthly Debt Obligations
5. Fannie Mae’s rule on debts paid at or before closing
6. HUD FHA Streamline Refinance
7. CFPB research: Cash-Out Refinances and Paydown Behavior
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: Cash-Out Refinance vs Ten-Property Blanket Loan When Selling One · How to Structure a Cash-Out Refinance That Pays Off Debt at Closing · Should You Pay Off Credit Cards With a Cash-Out Refinance?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Important disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage brokerage. Lendmire is not a direct lender, depository institution, or financial advisor. All loan inquiries are subject to lender underwriting; this article does not constitute a commitment to lend. Rates, terms, and program guidelines are subject to change without notice and vary by borrower profile, property type, and state. Information in this article is general in nature and is not financial, legal, or tax advice. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.