transaction, unless the borrowers are at grandparent
age. Tuition for a niece or nephew is equally suspect as
gifted funds from a cousin.
Business expansion: If a seasoned business has a proven
track record of profitability, cash-out to expand may
be a prudent risk. However, a business loan is more
appropriate. Using income from an unseasoned
source is projected income and therefore unusable.
Cash-out to fulfill a dream: The underwriter may be
unaware of this circumstance if the borrower is wary
about disclosing his or her dream. Tapping into equity
to finance a career change, committing a year to volunteering, or traveling extensively may be possible if a
substantial equity position remains along with sufficient
passive income. Some asset dissipation guidelines do
not allow refinance proceeds to be factored in. Realistically, loan proceeds will be used prior to liquidation
of retirement savings, but return to employment will
stave off long-term erosion of funds.
Cash-out for a medical emergency: This occurs very
rarely--only once in my career. The borrower had
rapidly deteriorating eyesight and wanted a specialist not covered by his medical insurance. We not only
approved the loan but concurred that it was appropriate for the three-day rescission period to be waived.
Circumstances were documented by a compelling
letter from the borrower.
Technical cash-out: Technical cash-out occurs when
loan proceeds are used to pay off a non-purchase
money lien or delinquent property taxes. There is no
potential for the borrower to take the money and run,
which elevates risk on standard cash-out transactions.
When the borrower also commits personal savings to
increase the pay-down, risk is even lower.
Slightly more than incidental cash-out: According to
generic guidelines, incidental cash-out is (and may forever be) $2,000 or 2% of the loan amount, whichever
is less. If a borrower receives $2,500 on a $250,000
loan, should the loan be considered high risk? The loan
is correctly classified as a cash-out transaction, but risk
is not elevated unless the borrower insisted on receiving that amount of proceeds and LTV is at maximum,
possibly indicating financial distress. Cash-out may
be instigated by a commissioned loan officer, who
convinced the borrower that cash proceeds are free
money as long as P&I doesn't increase.
Cash-out for equity buyout, as in a divorce or co-owner
situation: It is not a feel-good transaction but at least
it resolves a difficult situation, and use of proceeds is
documented with a specific buyout amount.
Cash-out for home improvement: Some improvements
enhance property value more than others. Online
research quantifies percentages of increased value
for various improvements. The prototype good example is an additional bathroom for a three-bedroom,
one-bath house. A truly bad example was an entertainment industry couple who remodeled to their
personal taste by replacing white marble with black
marble (or the other way around). Their property
value was not increased by the cost of the replacement. Even when value is affected minimally, improvements may enhance livability and enjoyment.
Cash-out for home improvement, in the ironic sense: This
cover-up is used when proceeds become the down
payment on another residence. The borrowers are