When homeowners decide it’s time to refinance, whether to get a lower rate, adjust the term or switch from an adjustable rate mortgage to a fixed rate loan, they also have the option of pulling out equity in the form of cash. This is called by the industry a “cash out” refinance. In addition to refinancing the loan and rolling the associated closing costs in with the loan amount, borrowers can add a bit more to the final loan and receive cash at the settlement table. So how does one qualify for a cash out refinance and what can the borrowers use the funds for?
A cash out refinance qualification is much like any other qualification. Borrowers are asked to provide evidence they can afford the new monthly payments with copies of recent pay check stubs and W2 forms. For the self-employed borrowers, they’re also asked to bring their two most recent federal income tax returns. In addition to any existing credit obligations, lenders like to see their level of monthly debt payments not exceed 43% of their gross monthly income.
With a cash out refinance, many times there is no need to supply bank statements because the borrowers aren’t needing any funds to pay for closing costs as those fees are not only rolled into the loan amount but the borrowers will actually be receiving funds, not paying them.
The property must also qualify for a cash out refinance. Conventional lending guidelines as that a cash out refinance be no greater than 80% of the current market value of the home although if the cash out loan amount is 75% or lower the terms will be slightly better. The lender will order an appraisal that will help determine the current market value of the home. The lender then orders a loan payoff from the current lender plus any interest due and adds the closing costs into the loan.
The borrowers will then have the option of pulling out cash and provide the loan officer with the amount of cash needed. Borrowers can use the loan proceeds for any purpose whatsoever including paying for college tuition, credit cards or home improvements. The use of the funds does not have to be approved by the lender.
The borrowers will sign the closing papers and wait the required three-day rescission period when the funds will either be wired directly into the borrower’s bank account or a cashier’s check will be provided. If you’re in the process of refinancing and have sufficient equity in your home, talk to your loan officer about the option of a cash out refinance.