Cash out refinance requirements

Taking out a cash out refinance means you'll increase the amount you owe on your mortgage, plus interest. 

Types of cash out refinance

Knowing the different options of a cash out refinance, may help you pick a product that's right for you.

• Conventional: Conventional cash out refinances are the most accessible option for most homeowners. You can potentially borrow up to 90% of your home's value and use the cash as you see fit. These loans can 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 FHA cash out refinance allows homeowners with an existing FHA mortgage to refinance and take out 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 This program allows homeowners to refinance and take out up to 100% of their equity. To qualify, you need to comply with VA loan requirements.

What are cash out refinance requirements?

Requirements for a cash out refinance vary between lenders. However, all lenders should check your credit score, current home equity, DTI ratio, and LTV ratio

Credit score

Typically, lenders require a minimum credit score to qualify for a cash out refinance. If you have excellent credit, you could be eligible for the best refinance rates.

Improving your credit score may save you money on 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, you might need at least $80,000 in equity to qualify. This requirement may vary from lender to lender, so 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, car, student loan, and mortgage payments) against your monthly income. Lenders typically prefer a DTI ratio lower than 43%, although some may accept higher ratios in certain circumstances.

For example, if your total monthly debt adds up to $2,000, and your monthly gross income is $6,000, your DTI ratio would be around 33% ($2,000/$6,000).

Learn more about DTI ratios to ensure you meet some of the common requirements of a 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 depend on the lender and any state or local laws and regulations.  

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 homes estimated value is $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?

Yes, in most instances. An appraisal determines the current market value of your home, which lenders use to calculate your LTV. Borrowers typically pay for an appraisal, so prepare to factor this cost into your budget. 

Learn how to understand your home appraisal report.

How to know if you qualify for a cash out refinance

When meeting cash out refinance requirements, the exact percentages for LTV, DTI, and creditworthiness may vary between lenders. For example, one lender may require a higher credit score than another.

Before applying, you can see where you stand with a cash out refinance calculator. Also, take some time to shop around for loan terms with different lenders.

How long does a cash out refinance take?

Much like with a home equity loan, it may take up to 6-8 weeks from submitting your application to closing. During this time, try 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, even disqualify you from getting a cash out refinance.

Speed things up by strengthening your application and preparing for the review process. For example, you can use comparable home values to estimate your property’s worth and determine how much money you could borrow.