Cashing In: The Essential Guide to Scoring a Cash-Out Refinance in 2024

Howdy friends, Alex MacLagan, The Mortgage Doctor here – your favorite local mortgage lender! Today we’re breaking down the nitty gritty on how to qualify for a cash-out refinance.

If you’re looking to tap into your home equity, a cash-out refi can be a smart move. But qualifying isn’t always so simple. Let’s walk through the key steps:

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Step 1: Check Your Home’s Equity

Before applying for a cash-out refi, you’ll want to estimate your home’s current value. Online home valuation estimators  can help or contact your loan officer and they will provide you with a estimation..

Subtract your unpaid mortgage balance from the estimate. The difference is your equity. Most lenders require at least 20% equity to qualify for a cash-out refinance.

Current Home Value: $300,000

– Existing Mortgage Balance: $200,000  

= Home Equity: $100,000

Not enough equity? Consider a rate-and-term refinance to lower your rate instead.

Step 2: Calculate Your New Loan Amount

Decide how much cash you need to pull from your equity. Lenders typically limit cash-out amounts to 80% of your equity.

Let’s say you need $50,000 cash. With $100,000 equity, that’s fine. Now calculate your new loan amount:

$200,000 (existing mortgage) 

+ $50,000 (cash out amount)

= $250,000 (new loan amount)

Step 3: Check Your Credit Score

Cash-out refinancing often requires a credit score of at least 620-640. Borrowers with scores of 700+ get the best rates.

Before applying, check your credit reports and FICO Scores. Dispute any errors to maximize your score.

Step 4: Review Income Documentation

Lenders will verify your income to ensure you can afford higher monthly payments after cashing out equity. Have recent pay stubs, W-2s, tax returns and bank statements ready.

Self-employed? Provide profit and loss statements plus two years of tax returns.

Step 5: Evaluate Your DTI Ratio

Debt-to-income (DTI) ratio compares your monthly debt payments to gross monthly income.

DTI is calculated as:

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Monthly Debt Payments / Gross Monthly Income

Many lenders require DTI below 50% for a cash-out refinance. Use a DTI calculator to check yours.

Step 6: Review Loan Options

Which loan type should you choose for a cash-out refinance? Consider:

• Conventional loans: Require 20% equity minimum. Offers flexible terms.
• FHA loans: Allow equity as low as 10%. Lower credit scores may qualify.
• VA loans: For veterans/military. No down payment or equity required.
• USDA loans: For rural properties. 100% financing available.

Compare options to find the best fit!

Step 7: Work With the Right Lender and Loan Officer

Partner with a trusted lender and loan officer like Alex MacLagan and his team. to shop for the lowest rate. Working with the right loan officer and lender can either make this an extremely stressful and draw out process or make it simple and easy.

Lock in your rate once you are ready to move forward. This protects you from rate hikes later.

Get a quick rate quote now to kickstart the process!

Let’s Recap…

Cash-out refinancing allows tapping equity while securing a lower rate. But qualifying has its challenges. Following these 7 steps will set you up for success:

1. Check your home equity
2. Calculate new loan amount
3. Review your credit score
4. Verify income documentation
5. Evaluate your DTI ratio
6. Compare loan options
7. Shop mortgage rates

Ready to move forward? Chat with a Alex MacLagan "The Mortgage Doctor" to explore your cash-out refinance options today!