The typical seasoning or waiting period for cash-out refinance loans is 6 months. This means you must own the property and have made six mortgage payments on the loan before you can tap into the home’s equity. This is the case for Fannie Mae, Freddie Mac, and FHA loans. The one exception to the rule is the VA loan; there are no seasoning requirements for the VA cash-out loan.
What is Seasoning?
Seasoning is a period that you own the home and make payments on the mortgage. It’s time for a new lender to see that you can make the payments on time. Consider this your ‘cooling off’ period. It gives you time to get used to your mortgage payments and even gain a little equity in the home. Refinancing too fast may leave you with less than desired results because you won’t have nearly as much equity as you might have hoped.
The VA Loan and Seasoning
The VA loan is the easiest loan to secure cash-out financing because they don’t require a seasoning period. But with no seasoning, you might not have very much equity in the home if you used VA financing. VA loans allow 100% LTVs. This means if you didn’t put any money down on the home, you probably don’t have much equity in it right away.
If you did make a down payment on your home with a VA loan, you may have a little equity. You also gain equity as your home appreciates, but this isn’t going to happen overnight. So the fact that there are no seasoning requirements for a VA loan doesn’t make that much of a difference.
The Conventional Loan Guidelines
If you have a Fannie Mae or Freddie Mac loan, you might think you are stuck waiting 6 months before you can refinance your home to take cash out of it. There are exceptions to the rule, though. It all comes down to the Delayed Financing rule.
This rule basically means that you didn’t take financing out when you bought the home, but you want to do so now. In other words, you paid cash for the property but now need some of that cash back. Because real estate is an illiquid investment, it can be tough to have your money tied up that way. If you can prove that you paid cash for the property with the settlement statement or a title search to prove there aren’t any liens on the home, you don’t have to wait the six month period.
The FHA Guidelines
The FHA has a few more guidelines that could prove to be difficult. They don’t have any seasoning requirements. You must make a minimum of six payments on the home in order to do a cash-out refinance. But, the FHA prefers if you wait at least one year.
Here are the benefits of waiting one year:
If you refinance before you make 12 payments on the loan, you cannot have any late payments during that time. Every payment must be made on time in order to qualify for the cash-out refinance. If you made any payments late, you will have to wait until you own the home for a minimum of 12 months to refinance for cash out of the home.
If you own the home for less than 12 months, you may also lose some of the home’s appreciation. The FHA will use the lesser of the original appraised value or the current home value. This means that if the home appreciated, you can’t use the higher value to tap into the equity. If you wait 12 months, though, you are able to do so.
Should You Use the No Seasoning Requirement Rule?
What you need to ask yourself is if it makes sense to take advantage of the no seasoning rule. Are you helping or hurting yourself with this rule? If you refinance too soon, you probably won’t have much equity to take out in the first place. Unless you use the VA loan, you are restricted to around 80% of the home’s value for your maximum LTV. Unless you made a large down payment and need to get some of that cash back, it might not make sense to refinance your loan before you own it for at least one year.
Every situation is different. If you do need cash quick, you can use the no seasoning rule in some cases. If you have a conventional loan, though, you will have to wait that 12-month period unless you paid cash for the home.