Maximize Your Cash-Out Refinance with a Conventional Loan

How much money can you borrow with a cash out refinance?

ATM machine dispensing moneyA cash-out refinance is a mortgage refinancing option in which the new loan is for a larger amount than the existing loan in order to convert home equity into cash. The most common reasons for a cash-out refinance are to pay off credit card debt, make home improvements, or fund other large expenses.

There are several key considerations when taking out a cash-out refinance, including the loan-to-value (LTV) ratio. The LTV ratio is a measure of the relationship between the loan amount and the value of the property. For example, if a borrower has a loan balance of $150,000 and the property is worth $200,000, the LTV ratio would be 75%.

The maximum LTV for a cash-out refinance will depend on the type of loan program.

The maximum LTV ratio for a cash-out refinance depends on several factors, including the type of loan program. For example, the maximum LTV ratio for an conventional cash-out refinance is 80%.

The cash-out guidelines are established by Freddie Mac and Fannie Mae.

Cash-out loans for investment properties and second residences have different cash-out limits. Please see the cash-out matrix below.

What can I use a cash-out refinance for?

  • Paying down the overdue principal balance of the existing main mortgage; paying off any outstanding subordinate mortgage debts of whatever age;
  • financing the payment of closing costs, points, and other prepaid goods
  • The borrower may add real estate taxes to the increased loan amount.
  • Delinquent real estate taxes (taxes that are more than 60 days past due) may be included in the new loan amount, but an escrow account must be established in accordance with applicable law or regulation.
  • Taking equity from the subject property for use in any way;
  • financing a six-month short-term refinance mortgage loan that merges a first mortgage and a non-purchase-money subordinate mortgage into a new first mortgage or refinancing the six-month short-term refinance mortgage loan

Many homeowners are refinancing their existing mortgage to pay off not just the initial mortgage, but also the second mortgage (if applicable) and high-interest credit card debt.

The following criteria must be met in order to qualify for cash-out refinancing:

The cash-out refinancing must be used to pay off current mortgages by obtaining a new first mortgage secured by the same property, or it must be a new mortgage on a property with no mortgage lien against it.

Properties that have been listed for sale must be withdrawn from the market on or before the payback date of the new mortgage loan.

To qualify for the cash-out refinance loan, one of the borrower(s) is required to have purchased (or acquired) the home during the preceding six months prior to the disbursement date of the new mortgage loan.

No waiting time is required if the borrower/lender is able to confirm that the borrower inherited the property or was lawfully handed it (separation, divorce, or dissolution of a domestic partnership).

Depending on the lender, second homes, in addition to one to four rental properties, are eligible for a cash-out refinance transaction.

Conventional cash out refinance credit score

The required credit score for a cash-out refinance mortgage is based on the equity reserve and debt to income ratio.

Debt to Income Ratio for a Cash-Out Refinance

For loans that are evaluated by automated underwriting, six months reserves is required, if the debt to income ratio exceeds 45%. Debt to income is lender lingo that compares the gross monthly income to the monthly bills paid each month. A 45% debt ratio means that the monthly bills, including the new mortgage payment, should not exceed 45% of the borrower's gross monthly income.

Loan-to-value ratio (remaining equity)

The new mortgage should meet the following equity requirement after adding the mortgages to be paid off, financed closing costs, and any additional debt (i.e., credit cards, installment loan(s), and settlement monies):

Property Type Cash Out Limits
Primary Residence 1 Unit Fixed rate interest rate and adjustable rate – 80%
  2-4 Units Fixed rate and adjustable rate – 75%
Second Homes 1 Unit Fixed rate and adjustable rate – 75%
Investment Property 1 Unit Fixed rate interest rate and adjustable rate – 75%
  2-4 Units Fixed rate and adjustable rate – 70%

Here's the calculation for the residule equity. Let's say the existing mortgage is $100,00, and we're rolling in the closing and prepaid expenses ($4,000) and we're paying off $5,000 in credit card debt. The new loan would be $109,000. Now divide the new mortgage by the appraised value, estimated at $136,250($109,000/$136,250 = 80%).

In this example, the borrower meets the residule equity guideline, but if the appraised value was $125,000, the remaining equity would be 87.2%. In this example, the borrower would not meet the equity requirement. There are two choices with this sceanerio, either reduce the cash-out or bring money to settlement.

SOURCE: Cash-Out Refinance Transactions

Conclusion

The maximum LTV for a cash out refinance is set at 80% of a property's value. This limit protects both the lender and the borrower from taking on too much risk. While there are some exceptions, most lenders will require a borrower to have at least 20% equity in a property before approving a cash out refinance.

SOURCE:
Eligibility Matrix
Cash-out Refinance Transactions

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