For homeowners that want to get cash for home renovations, debt consolidation, or a large purchase, cash out refinances make plenty of sense. With a cash out refinance, you refinance your mortgage for more than you owe and receive the difference in cash. Learning the requirements can help you better prepare your application if you’re curious about applying.
What is a cash out refinance?
It's important to remember that a cash out refinance means you'll be increasing the amount of your mortgage plus interest. You’ll want to pick the loan option that best matches your needs.
Types of cash out refinance
There are different types of cash out refinance programs, each with its own set of requirements. If you're considering a cash out refinance, knowing the differences between the various programs can help you pick the one that's right for you.
- Conventional: Conventional cash out refinances are the most accessible option for most homeowners. With a conventional cash out refinance, you can potentially borrow up to 90% of your home's value and use the cash as you see fit. Conventional loans have credit and income requirements, but you don’t need to have a federal loan or be a member of the VA to qualify.
- FHA: A Federal Housing Administration (FHA) cash out refinance allows homeowners with an existing FHA mortgage to refinance and take out extra cash up to 95% of their home’s value. This program requires homeowners to qualify for a new mortgage based on current FHA criteria, including creditworthiness and DTI.
- VA: A VA cash out refinance is only available to military service members, veterans, and certain surviving spouses who are VA members. The VA program allows borrowers to refinance and take out up to 100% of the home’s equity. Be aware that VA cash out refinances require homeowners to show proof of eligibility and compliance with VA loan requirements.
What are cash out refinance requirements?
There are specific requirements that you need to meet before you can qualify for a cash out refinance. While specific requirements can vary from lender to lender, all lenders will check your credit score, current home equity, DTI ratio, and LTV ratio.
Credit score
Lenders require a minimum credit score to qualify for a cash out refinance. Your credit score doesn’t just help you qualify for a cash out refinance; if you have excellent credit, you could be eligible for the best refinance rates available. Improving your credit score can help you save money on monthly cash out refinance payments.
Home equity
Home equity is the difference between your home’s current market value and the remaining balance on your mortgage. You may need at least 20% equity in your home to qualify for a cash out refinance. For example, if your home is worth $400,000, your mortgage balance must be $320,000 at most to qualify. This requirement may vary from lender to lender, so make sure to do your research to find the terms that work best for you.
Debt-to-income (DTI) ratio
Your DTI ratio measures your monthly debt payments (such as credit card bills, car payments, student loans, and mortgage payments) against your monthly income. Lenders typically prefer a DTI ratio lower than 43%, although some may accept higher ratios in certain circ*mstances.
For example, if your total monthly obligations add up to $2,000, and your monthly gross income is $6,000, your DTI ratio would be 33% ($2,000/$6,000) and would likely qualify you for a cash out refinance. Consider learning more about DTI ratios to ensure you meet the requirements for cash out refinance.
Loan-to-value (LTV) ratio
Your LTV ratio is the amount of your mortgage divided by the appraised value of your home. Lenders may allow a maximum LTV ratio of up to 90% for cash out refinances, meaning you can't borrow more than 90% of your home's appraised value. However, this limit may depending on which lender you choose and if any state or local laws and regulations affect the maximum amount you are eligible to borrow.
To calculate your LTV ratio, divide the amount of your existing loan balance by the appraised value of your home. For instance, if you have a loan for $150,000 and your home is appraised at $300,000, your LTV ratio would be 50%. The lower your LTV ratio, the more likely you are to qualify for a cash out refinance.
Do you need an appraisal for a cash out refinance?
You will need an appraisal to qualify for a cash out refinance. The appraisal determines the current market value of your home, which is then used to calculate your LTV ratio. Note that the cost of the appraisal is typically paid for by the borrower, so prepare to factor that into your budget. However, you may find that some lenders offer to cover the cost of the appraisal for you. If you have more questions, you can always learn how to understand your home appraisal report.
How to know if you qualify for a cash out refinance
Although the factors determining whether you meet cash out refinance requirements are typically the same across all lenders, the exact percentages for LTV, DTI, and your creditworthiness may vary. For example, one lender may require a higher credit score than another, making qualifying for a cash out refinance tougher.
Before sending in applications, check to see where you stand with a cash out refinance calculator and review a refinance checklist. Both tools can prepare you for your application. Also, take some time to shop around for loan terms with different lenders that suit your qualifications.
How long does a cash out refinance take?
Much like with a home equity loan, it may take up to 6-8 weeks from filling out your application and processing to closing. During this time, make sure not to open a new credit card, get a new car loan, or do anything that could impact your credit score, DTI, or LTV. A big enough change could impact your loan terms or, in an extreme scenario, disqualify you from getting a cash out refinance.
You can also help speed up the application process by strengthening your application and preparing for the review process. For example, you can use comparable home values to estimate your current home value before the appraisal. Estimating your home’s value can give you a ballpark range of how much cash you can borrow with a cash out refinance.
