Last updated: November 05, 2024

Mortgage Products

Cash out refinance requirements

Couple sitting at a table and researching mortgage refinance options

For homeowners who want to get cash for home renovations, debt consolidation, or a large purchase, cash out refinances make plenty of sense. You can refinance your mortgage for more than you owe and receive the difference in cash. Learning the requirements for a cash out refinance helps you prepare your application.

What is a cash out refinance?

A cash out refinance is a mortgage refinancing option that allows homeowners to obtain cash by borrowing more than they owe on their current mortgage.

  • Some options to pick from are conventional, Federal Housing Administration (FHA), or Veterans Affairs (VA) refinance.
  • When you apply for a cash out refinance, lenders may look at factors like your credit score, debt-to-income (DTI) ratio, loan-to-value (LTV) ratio, and home equity.
  • You can use tools like calculators to help determine whether you qualify for a cash out refinance.

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.

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Ready for a cash out refinance? Discover® Home Loans offers low fixed rates on mortgage refinancing up to 90% LTV with $0 application fees, $0 origination fees, $0 appraisal fees, and $0 costs due at closing. 

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. 

Closing thoughts: Cash out refinance requirements

All in all, cash out refinances are a convenient way to access capital. By familiarizing yourself with the application process, you may increase your chances of qualifying for a product that meets your needs.

If you’re interested in a cash out refinance, check out this refinance application checklist to ensure you’re ready for your application.

Please note: Discover offers conventional loan rate-and-term refinancing and cash out refinancing opportunities but does not offer FHA or VA loans.

The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank, its affiliates, or successors.

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