How does the appraisal affect a cash-out refi, and when can I cash out?

The appraisal decides how big the check can be

A cash-out refinance replaces your mortgage with a bigger one and hands you the difference. How much bigger is capped as a percentage of the home's value, called loan-to-value (LTV). The appraisal is where that value comes from.

Fannie Mae's Eligibility Matrix lists these cash-out maximums for loans run through its Desktop Underwriter system:

Here is a hypothetical. A primary home appraises at $900,000. At 80%, the new loan can be up to $720,000. If you owe $450,000, you could pull out about $270,000 before costs. If the value comes in at $850,000, the cap drops to $680,000 and your cash drops by $40,000. Every dollar of value is worth 80 cents to you here. That is the most motivating math in mortgage lending.

FHA, VA, jumbo and non-QM loans have their own limits. Ask your loan officer which program you are in.

Rule one: six months on title

Fannie Mae's Selling Guide (B2-1.3-03) says at least one borrower must have been on title for at least six months before the new loan disburses.

There are exceptions. No waiting period applies if the lender documents that you got the property through an inheritance, or that it was legally awarded to you in a divorce, separation or dissolution of a domestic partnership. Time the property was held by an LLC you control, or by a revocable trust where you are the primary beneficiary, can count toward the six months. Delayed financing, covered below, is its own exception.

One more trap: if the house is listed for sale, it has to be taken off the market on or before the disbursement date. Lenders are not fans of a borrower who refinances on Tuesday and sells on Thursday.

Rule two: the old loan has to be 12 months old

If the refinance pays off an existing first mortgage, Fannie Mae says that loan must be at least 12 months old, measured from the old loan's note date to the new loan's note date.

This is the rule that surprises people. You bought with a mortgage, you finished the remodel in month seven, and you are ready to pull out the equity you created. For a Fannie Mae cash-out, the calendar says wait until the old note has its first birthday.

The 12-month rule does not apply to paying off a second lien, or to buying out a co-owner under a legal agreement. It also sits on top of the six-month title rule, not instead of it. Other loan programs and portfolio lenders may set different waiting periods, which is one reason investors shop lenders on this exact question.

Bought with cash? Delayed financing can move faster

If you paid all cash, Fannie Mae's delayed financing exception lets you do a cash-out refinance within six months of buying. The main requirements:

• The purchase was arm's length (not a deal with a relative or yourself).
• A settlement statement shows no mortgage financing was used.
• Title shows no existing liens, and the funds used to buy are documented.
• If you borrowed the purchase money elsewhere, such as on another property, the cash-out has to pay that loan off.

Here is the catch most people miss. The LTV limits are based on the current appraised value, but the new loan cannot exceed your documented initial investment plus financed closing costs, prepaid fees and points. If you bought for $400,000 cash and the house now appraises at $600,000, delayed financing gets your $400,000 back (plus allowed costs, within the LTV limit). It does not hand you the new equity. That waits for the regular rules.

Sometimes there's no appraisal at all

Fannie Mae offers value acceptance, its appraisal waiver, on some cash-out loans. Its limits are tighter: up to 70% LTV on a primary home and 60% on a second home or investment property. It is for one-unit properties, and transactions with an estimated value of $1,000,000 or more are not eligible. Fannie Mae's system also will not offer it if an appraisal was uploaded on the property within the prior 120 days.

A waiver saves time and a fee. It also means the value came from a model, not from someone who saw your new kitchen. If your plan depends on credit for recent improvements, ask your loan officer whether paying for an appraisal would get you a higher value than the one the system accepted.

What to do before you apply

1. Count the calendar. Check your title date and your current note date against the six-month and 12-month rules.
2. Run the math at the right LTV for your property type. Do it at two values, the one you hope for and one 5% lower.
3. Document improvements with dates, costs, permits and photos. An appraiser values what is there on the effective date, so finished work counts and planned work does not.
4. Pull recent closed sales of homes in similar condition. What you paid is history. Value comes from what the market is paying now.
5. Take the listing down before disbursement if the house is on the market.
6. Talk to your CPA if you are cashing out on a rental, since how you use the money can matter at tax time.