Maximum Loan to Value (LTV) for a Cash-Out Refinance Mortgage

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

ATM machine dispensing moneyIf you've owned your home long enough to build equity with monthly mortgage payments and appreciation, you may be thinking about borrowing against the value you've built up.

This is known as cash out refinancing, in which you refinance your current mortgage and get cash back at the closing table in the form of a lump-sum payment. Borrowing against the equity in your home is used for a number of reasons by many people and couples.

The maximum loan-to-value (LTV) limit for a conventional loan is 80 percent for cash out refinance transactions for a single family residence. 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Properties that have been listed for sale must be withdrawn from the market on or before the payback date of the new mortgage loan.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

In conclusion, conventional loan limits for cash out refinances are 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.