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How Do You Qualify for A Cash-Out Refinance?


The Spire

Imagine being able to consolidate debt, pay off your kid’s college tuition without a student loan debt or even find money to invest and save for retirement. These are some of the benefits homeowners can get from a cash-out refinance. But before getting started with applying for a cash-out refi, it’s best that you find out the requirements. Typically, lenders set their own qualifications. Therefore, expect the qualifications to differ from one cash-out refinance lender to another. However, all lenders generally look for the following requirements amongst cash-out refinance applicants. 


1.    A Stable Source of Income 

In the eyes of the lender, a stable source of income portrays low risk. It shows a homeowner’s ability to repay the loan on time. Lenders may ask for proof of employment or ask for bank statements and check your monthly earnings. In this case, a stable source of income means a job with guaranteed pay or an already established business. Irrespective of where you fall under these categories, providing proof can increase your chances of qualification for a cash-out refi. 


2.    A Good Credit Score 

Some people have stable sources of income but poor credit scores. Lenders are well aware of that, and it’s why they must also perform a credit score check. A good credit score indicates the ability to pay back the loan. And it’s important to know that your credit score determines the new mortgage rate. People with higher credit scores of more than 700 enjoy lower interest rates. Therefore, you need to work on your credit score if you want a cash-out refi with favorable terms. For most lenders, the least credit score requirement falls around 580 to 620. 


3.    A Debt-to-Income Ratio of Less than 50% 

The other thing that makes a cash-out refi applicant more attractive to a lender is a low DTI ratio. The Debt-to-Income ratio is the percentage of your monthly salary used to repay monthly debts. For most lenders, the ideal DTI ratio requirement is below 50%. Depending on the lender, it can be as low as 43% or 36%. That you will have to confirm when shopping for cash-out refi rates. As long as you have an extremely low DTI ratio, you will pass the requirements of a cash-out refinance. 


4.    Enough Equity 

Cash-out refinance loans are all about borrowing from a home’s equity. The more equity a homeowner has, the more funds they can cash out. However, if the equity is still small, homeowners should be able to leave behind at least 20% of the home’s equity after cashing out. This is a mandatory requirement that needs a thorough evaluation. You need to estimate how much you can get from a cash-out refinance. This will help determine whether this type of loan is worth exploring, especially if the equity built is relatively low. Remember, you can never cash out all of the equity. And there are closing costs that have to be paid. 


5.    A Low Loan-to-Value Ratio 

For most lenders, the loan-to-value ratio stands at 80%. An LTV ratio is a financial ratio that compares the size of a loan to a property’s value. It’s what lenders use to determine risk. The LTV ratio should be around 80% or lower for conventional and FHA cash-out refinance. For VA loans, however, veterans can borrow up to 100% of a home’s value. 


6.    A New Appraisal 

The final qualification for a cash-out refinance is a new appraisal. This is a valuation for a home that should be unbiased and conducted by an expert. In this type of loan, the value of your home plays a critical role in how much money you will get at closing. 


Bottom Line 

These are the six main requirements for a cash-out refinance. Definitely, these qualifications will differ amongst lenders. But they should revolve around the terms and figures mentioned. 

A Lending Hand for Financing Home Mortgages

Spire Financial (A Division of V.I.P. Mortgage, Inc.) brings lending expertise to you. All of our loan officers offer personalized communication for every client, guiding them through the process. We can show you ways to maximize your finances and unlock future opportunities. Spire Financial keeps you in control of refinancing, debt consolidation, and home equity. Together, we can achieve your financial goals.