Getting a Cash-Out Refinance on a Home Listed for Sale
A cash-out refinance is a great way to tap into your home's equity. You can use the funds for anything, whether making improvements, paying off high-interest debt, or purchasing additional real estate.
But what if your home is currently (or was recently) listed for sale? Do lenders have different rules when it comes to refinancing a property that you’re trying to sell?
Conventional, FHA, and VA Guidelines on Homes Listed for Sale
Conventional guidelines allow lenders to do cash-out refinances on homes that have recently been listed for sale.
The only stipulation is that the property must be off the market by the time the loan closes. Neither Fannie Mae nor Freddie Mac set any restrictions on how long your house has to be off-market before completing your refinance.
FHA and VA guidelines don't have any specific rules regarding homes that are listed for sale.
For conventional loans, you must still be living in the home to get the best rates. Moving out of the home will disqualify you altogether from an FHA or VA loan.
Why Some Lenders May Not Offer Cash-Out Refinances on For-Sale Properties
While lending guidelines largely allow for cash-out refinances on properties that are, or have recently been, listed for sale, individual lenders can impose their own requirements. In practice, it may be tough finding one willing to do a cash-out refinance while you're actively trying to sell the home.
Two primary reasons behind this are additional risk and a shorter repayment period.
Additional Risk
Lenders charge an interest rate based on perceived risk. For example, a borrower is less likely to default on a home they live in. As such, the rates for primary residences tend to be lower.
But a home that was just listed for sale is at risk of becoming a rental property shortly after closing. If you get a primary residence cash-out refinance, you must live in the home 12 months after completing the loan assuming you don't sell before that.
Shorter Repayment Period
At the same time, lenders earn profit through the monthly interest installments on your loan. While they don’t expect every mortgage to run its full 30-year term, they anticipate more than just a few payments.
They’re less eager to fund a cash-out refinance that's likely to be paid back within months. A quick repayment costs the end investor money.
Lender-Specific Requirements for a Cash-Out Refinance
Individual lenders often have a waiting period following a property being delisted. In many cases, lenders make you wait up to six months after a property has been taken off the market before they’re willing to write a cash-out refinance.
Again, if you encounter this issue, it's lender-specific. Nothing in Fannie Mae, Freddie Mac, FHA, or VA guidelines prevents you from getting a loan on a home that you recently had listed for sale. So, if your lender requires a waiting period that doesn't meet your needs, apply with another company with less restrictive policies.
Don’t Forget: You’ll Be Paying Closing Costs
Even if a cash-out refinance is an option, it's crucial to weigh the costs. More specifically, the closing costs associated with refinancing your new loan.
You can anticipate a cash-out refinance incurring closing costs that range from 2% to 4% of the loan’s total. This can include expenses like:
Underwriting fees
Title insurance
Escrow services
Appraisal costs
Lender points
Many of these costs are based on your entire refinanced loan – not just the amount of equity you're cashing out. The total could add up if you already have a sizable mortgage. Especially if you only plan to cash out a small amount of equity.
FHA & VA Cash-Out Refinances
You may incur extra fees if you're getting a cash-out refinance through the FHA or VA.
All FHA refinances come with a 1.75% upfront mortgage insurance premium. This premium is due at closing and is based on the total value of the mortgage. For a $300,000 cash-out refinance, this would be an additional cost of $5,250.
Most VA refinances come with a 3.3% VA funding fee due at closing: $9,900 on a $300,000 cash-out refinance.
Because of the unique costs associated with FHA and VA loans, they may not be the best refinance choice for someone hoping to sell their home shortly.
Use a Cash-Out Refinance to Renovate Your Home Instead of Selling
Are you planning to sell your primary residence to purchase another property? Consider using a cash-out refinance to renovate your current home instead.
In some situations, it can make more sense to change your existing space to better fit your needs than it can to move somewhere new:
Selling your home can cost you big. The average homeowner incurs selling expenses and closing costs between 9% and 10% of their property's selling price. When you sell, you effectively give away 10% of your built-up equity.
Using a cash-out refinance to renovate your current home can increase its value at the same time. By making major improvements or additions, your home will likely be worth more than it presently is when you do eventually sell.
If you don’t have enough equity to cash out what you need for your renovations, you can also consider conventional fixer-upper loans. These rehab loans are based on the property's after-repair value, not its current appraisal. They may offer you access to more equity than a home improvement cash-out refinance.
Frequently Asked Questions About Refinancing a Home for Sale
Here are some of the most frequently asked questions regarding getting a cash-out refinance on a home listed for sale.
How Long Does a Home Have to Be Off the Market Before Refinancing?
Conventional lending guidelines require that your home is off the market on or before the day that the loan closes. FHA and VA guidelines don't have this requirement, and you may even be able to get a loan on a property that's currently listed for sale. However, individual lenders have their own rules, and finding one to write a loan on a for-sale property could take some effort.
Can You Sell Your House After Refinancing?
In most cases, nothing is stopping you from selling your home immediately after refinancing. However, it’s likely not worth refinancing if you’ll sell right away. You’ll pay a lot of closing costs for little if any benefit. If you need cash to put down on another home, try a bridge loan or other equity advance program.
How Long Does a Cash-Out Refinance Take?
A cash-out refinance can take weeks to close, even in the best-case scenario. Usually, you can plan for closing to take 30 to 45 days, assuming everything goes smoothly. Are you trying to refinance your listed property because you need access to funds fast? You may want to consider a quicker closing alternative, such as a personal loan.
Refinancing a Home That Is Listed for Sale
If your property has recently been listed for sale, there's nothing in the lending guidelines that would stop you from getting a cash-out refinance. Even currently listed homes are eligible if they're taken off the market by the time the loan closes.
However, some individual lenders may hesitate when it comes to for-sale or recently listed homes. If you run into an issue, your best strategy is to apply with other lending companies until you find one that can accommodate your cash-out refinance needs.
