5 Qualification Requirements for Cash-Out Refinancing

Are you thinking about refinancing your mortgage loan and cashing out some of your home equity at the same time? You will want to ask your mortgage lender about cash-out refinancing options. If this solution seems right for you, then you can apply for a cash-out refinance loan. 

Cash-out refinancing allows you to refinance your existing mortgage loan at a new rate (ideally a lower mortgage rate). In addition, you can tap into your home equity and borrow a portion of that. Your new loan principal total will be based on the combination of what you still owe plus the amount you borrow from your equity. A healthy financial standing and ample home equity will help you qualify for a lower mortgage interest rate.

cash-out refinancing

Here Are 5 Of The Most Important Qualification Requirements For Conventional Cash-Out Refinancing:

  1. At Least 20% Home Equity

The first item to consider is your current home equity. How much is your property currently worth compared to what you still owe on your original mortgage loan? If your house appraises for $400,000 and you have a $275,000 principal balance remaining on your home loan, then your current home equity is $125,000. Most cash-out refinancing programs require at least 20% of equity in your property. That means it is worth at least 20% more than you owe. 

A very important step in the cash-out refinancing qualification process will be a professional home appraisal ordered by the lender. A third-party home appraiser will determine the fair current market value of your home. Then, that can be compared against your existing principal balance to calculate your qualified home equity. If you don’t have 20% equity (or more), you aren’t very likely to qualify for a cash-out refinance loan. You may want to ask about separate home equity loans and home equity lines of credit (HELOCs) as alternative solutions.

  1. FICO Score of 620 or More

Most cash-out refinancing lenders will require a credit rating of at least 620. This is basically the industry standard, though the requirements can vary from lender to lender. The type of loan may also factor into the credit score requirement. FHA refinance loans and VA refinance loans will have their own qualification standards. You may be able to qualify for a cash-out refinance loan with a lower FICO score, depending on your other financial qualification standards. For example, you may have a very high amount of equity built up or a strong income that will reduce some of the risk for the mortgage lender.

  1. 80% (or Less) Loan-to-Value Ratio

Another important calculation will be your loan-to-value (LTV) ratio. This means you cannot borrow more than 80% of the total appraised value of your home. Using the example from before, let’s say your home is appraised for $400,000 and you still owe $275,000 on your original mortgage loan. The new total loan limit will be 80% of the appraised value, which is $320,000. If you were to max out your new loan, you would be able to borrow up to $45,000 of your home equity ($320,000 minus $275,000).

  1. 43% (or Less) Debt-to-Income Ratio

Just like when you applied for your original mortgage loan, your lender will calculate your debt-to-income (DTI) ratio. This is your total minimum monthly debt payments measured against your average monthly pre-tax income. Most lenders are looking for a DTI of 43% or less. If you have high debts or a low income in relation to certain monthly bills and debt payments, you may not be able to qualify for cash-out refinancing. Work to pay down your debts or increase your income before applying for a mortgage loan or refinance loan. Again, there may be some flexibility here depending on the other qualifying factors like your credit score or home equity.

  1. Income and Employment Verification

In addition to running a credit check, home appraisal and reviewing your financial data, the mortgage lender will need to verify your income and employment. Be prepared to show tax returns for the previous two years, as well as provide recent W-2s and/or pay stubs. Self-employed loan applicants may have to provide even more proof of income documentation. The lender simply needs to see that you have a steady source of income that enables you to make your new mortgage payments, which will likely be higher than your old mortgage payments because of the equity you are borrowing on top of your existing principal balance.

These are the primary qualification requirements you need to know when applying for a cash-out refinance loan. Get your finances in order and make sure you are eligible for a cash-out refi program. The right mortgage lender will be able to answer all your questions and guide you through the application/appraisal/qualification process.
For homeowners in the Atlanta area looking for cash-out refinancing and other home equity borrowing solutions, contact Moreira Team | MortgageRight today.