How to Qualify for a Cash-Out Refinance in 2024

Experts predict mortgage rates will finally come down in 2024.

The same sources say home values will rise.

This, by the way, is the perfect scenario in which to capitalize on a cash-out refinance. Homeowners can reduce their rate (and potentially payment) while tapping into their home equity.

Here’s how to qualify.

Eligible Uses for Cash-Out Funds

There are almost no restrictions on what you can do with loan funds. Some eligible ways to use the cash are as follows:

• Pay off the existing mortgage that is over 12 months old

• Pay off other liens on the subject property or another property

• Complete home improvements

• Consolidate non-mortgage debt including credit cards and student loans

• Invest in other real estate

• Build an emergency fund

• Launch a business

• And almost any other purpose

With so many uses for a cash-out loan, how does someone qualify?

How a Cash-Out Refinance Works

With a cash-out refinance, you take out a bigger loan than you currently owe and receive the difference in cash.

Remember that you must pay for closing costs out-of-pocket or by rolling them into the loan. Your cash received will be your loan amount less any underlying loans and closing costs.

Example

Is a Cash-Out Loan a Good Idea?

Cash-out loans are best for those who need a lot of cash. Financing charges can be high – around 2-4% of the loan amount –to pay for an appraisal, title, escrow, loan fees, and more.

If you need less than $50,000, consider a home equity line of credit or personal loan. Both come with lower upfront costs compared to a cash-out refinance.

A caveat is when you can reduce your rate and payment at the same time. If you would refinance anyway, it’s worth considering getting cash while you’re at it.

Important to Consider

You need significant equity – probably 30-40% – for a cash-out refinance to be worth it. Your maximum loan is typically 80% of the property’s value, and you need much more equity than that to see cash at closing.

Maximum Loan-To-Value (LTV)

Most often, loan-to-value limits will determine your maximum loan (but see loan limits and debt-to-income sections below).

Conventional LTV maximums:

• FHA cash out: 80% LTV

• VA cash out: 90-100% LTV, depending on lender

For example, your 1-unit $300,000 primary residence is eligible for a loan amount up to $240,000 assuming you qualify for the loan.

How Much Cash Can You Receive?

Cash back is capped by your property value, debt-to-income ratio, and local loan limits as discussed below.

In theory, the most cash back someone could receive on a conventional loan is $1,149,825 assuming a 1-unit property and no existing loan. This is the 2024 loan limit for the most expensive locations in the U.S.

Someone with a 2-4 unit home or jumbo loan could receive even more with a cash-out refinance.

Cash-Out Refinance Loan Limits

Conventional and FHA cash-out loans are subject to local loan limits. For 1-unit properties, conventional loan limits are $766,550 for 2024 and higher in some locations.

FHA loan limits are $498,257 in most areas but up to $1,149,825 in expensive locales. There are no loan limits for VA cash-out loans except as set by the lender.

Keep in mind the above are loan limits, not property value limits. For instance, you could get a $700,000 conventional cash-out loan on a $1 million property anywhere in the country since the loan amount is below conventional limits.

Debt-To-Income (DTI) Ratio

You must meet debt-to-income ratio limits to qualify for a cash-out loan. Expect stricter DTI limits compared to purchase loans.

General DTI limits are as follows:

• Conventional cash-out: Under 45%

• FHA cash-out: Under 50%

• VA cash-out: 41%

Keep in mind that your DTI limit could be higher or lower. Those with strong attributes may be approved with higher DTIs. These include cash reserves and high credit scores.

Reserves

Your cash-out refinance may not require any cash reserves. But in some situations, reserves are required.

Weak credit profile: You may need to show reserves to be approved.

Conventional cash-out over 45% DTI: There’s a hard-and-fast rule that you’ll need six months’ reserves.

Multiple financed properties: Reserves of 2-6% of all mortgage balances on financed properties.

Reserves may not be derived from cash-out funds from the transaction.

Credit Score

Those with low credit should consider the FHA cash-out program. Credit scores down to 580 can be approved. Conventional loans require 620, but applicants should have 720 or greater for the best rates.

Mortgage Rates

Mortgage rates can be quite high for cash-out loans. They are considered the riskiest type of mortgage, especially for investment properties and second homes.

Expect a rate about 0.50% to 1.0% higher than purchase and no-cash-out refinance loans.

Waiting Period

You can’t always get a cash-out refinance immediately. Here are guidelines and exceptions for conventional loans.

• The primary mortgage to be paid off must be 12 months old

• At least one loan applicant must be on title for six months

There is no waiting period when:

• The property was received or awarded in an inheritance, legal separation, divorce or dissolution of a domestic partnership

• The property was purchased 100% in cash

• The property was owned by an LLC or trust for six months. The LLC or trust must be majority owned/controlled by the borrower

FHA: You must live in the home as your primary residence for 12 months to be eligible for cash-out unless the home was inherited.

Cash-Out Refinance Programs

Which program you choose depends on your situation.

Conventional cash-out: This is the most common kind. Lenders will underwrite the loan based on Fannie Mae or Freddie Mac standards.

FHA cash-out: Surprisingly, FHA has a cash-out program that allows you to refinance up to 80% of your home’s value. Credit scores down to 580 are eligible.

VA cash-out: You can pay off any type of underlying loan plus receive cash back at closing. Some lenders allow you to take cash out up to 100% of your home’s value.

Jumbo: Many banks and lenders offer proprietary jumbo cash-out programs. Applicants generally need significant home equity and high credit scores to qualify.

Non-QM: Some cash-out loan types don’t require traditional income documentation, such as bank statement loans and debt service coverage ratio (DSCR) loans.

Ineligible Purposes for Conventional Cash-Out Loans

• The cash-out loan may not have an interest rate buydown

• You must pay off a Property Assessed Clean Energy (PACE) loan instead of taking cash if you have the equity to do so

• Loan proceeds may not pay off an installment land contract

• Loans without an escrow account are not eligible if funds will finance property taxes that are more than 60 days late

Start your Cash-Out Refinance

You might have tremendous equity in your home. And rates could be lower than when you purchased or refinanced.

Check your eligibility for cash-out refinance to drop your rate and tap into equity.