Answer
Properties owned free and clear may also be refinanced.
If the property has been owned as a principal residence for less than 12 months preceding the loan application, the loan amount is based on the lesser of 85% of the sales price or the current appraised value of the property.
The sales price need not be considered if it was inherited.
Borrowers are not eligible:
who are delinquent or have mortgage delinquencies within the most recent 12 month period
with less than 6 months payment history on the existing mortgage
The mortgage must be current and all payments must have been made within the month due for the previous 12 months; or for more than 6 months and less than 12 months of payment history, all payments were made when due.

Non occupant co borrowers may not be added to cash out refinance transactions to meet FHA credit underwriting guidelines for the mortgage. Any co borrower being added to the note must be an occupant.

Cash out refinances that pay off land contracts as well as refinancing properties subject to ground rents are treated in the same manner as cash out refinance transactions on properties where the ownership is held in fee simple.

Cash out for debt consolidation represents considerable risk and must be carefully evaluated, especially if there has not been a corresponding income increase.

Case Numbers assigned on or after April 18, 2 011
Former investment properties re-occupied as a principal residence less than 12 months prior to the loan application date, are limited to rate/term no cash out refinance and 85% LTV.

ML 11-11
Handbook 4155.1 3.B.2