Cash-out refinancing is one of the most common and popular ways to access a property’s equity. But if you’re a homeowner looking to use the equity you’ve built up for a home renovation, debt payment, or unexpected medical bill, you might run into a problem if you have a high DTI ratio or low credit score.
Can you still get a cash-out refinance with a high DTI ratio? Let’s break down the answers and provide additional guidance for borrowers regarding cash-out refinancing.
A cash-out refinance involves refinancing your original mortgage loan for a higher amount than the remaining mortgage principal. You take out a mortgage for a higher amount than your current loan principal, pay off your original mortgage with that new mortgage, and pocket the remaining cash to use for home renovations or debt consolidation.
For example, say you have $200,000 remaining on your current mortgage. You take out a cash-out refinance mortgage loan for $300,000. You then pocket $100,000 to use. On the downside, your mortgage term will restart, so it takes longer for you to pay off your mortgage balance.
Note that this type of mortgage refinance has the same features as many conventional loans, for instance, closing costs. Still, they can be effective for debt consolidation and other uses compared to personal loans.
DTI, or debt-to-income ratio, is a measurement of your total monthly debt payments relative to your monthly income. For instance, say your monthly income is $4,000, and your monthly debt payments include:
Your monthly loan payments are $1,600. Your DTI ratio is 1,600÷4,000 or 40%. A higher DTI ratio means more of your monthly income goes toward your current debt obligations. Lenders and credit companies alike prefer lower DTI ratios.
Mortgage lenders determine your mortgage rate based on your DTI ratio, credit score, and financial history. Obtaining a low DTI ratio is a good idea if you have home buying ambitions and want a new loan with a lower interest rate than average.
You can sometimes get a cash out refinance with a high DTI ratio, though it’s usually difficult.
To qualify for most cash-out refinance offers from traditional lenders, your debt-to-income ratio should be no higher than 43%. The lower your DTI ratio, the better interest rates and terms you'll get for any potential cash-out refinance. Qualifying buyers will find more real estate options open to them, plus higher loan amounts based on their credit report.
If your DTI ratio is higher than 43%, you likely won’t qualify for most refinance loans or home equity lines of credit (HELOCs). However, you may still be able to qualify for nontraditional refinance opportunities. These include:
Any of these sources could allow you to use the equity you’ve built up in your property to pay for home renovations or other debts, like home equity loans. But keep in mind that there may be strings attached, like origination fees and high interest rates.
A high DTI ratio almost always excludes you from excellent cash-out refinance opportunities. It also prevents you from making the most of your home’s equity.
However, it can be hard to lower your DTI ratio if you have lots of debts dragging down your credit score and eating up your monthly income. You might only need to access your home’s equity specifically to pay off many separate debts, reducing your overall debt load or eliminating some smaller debts so you only have one monthly bill with one interest rate to pay each cycle.
Although certain cash-out refinance opportunities may be available to you even with a high DTI ratio, that doesn’t mean you should necessarily take advantage of them. Instead, it might be better to access your home’s equity through alternative means to improve your personal finances.
That’s where Balance can help. Balance invests in your property’s equity so you become co-owners of the home. If you become a co-owner with us, we may pay you a lump sum for up to 85% of your home’s equity.
The benefit? We pay off your mortgage and replace it with simplified and affordable monthly payments that cover your exclusive occupancy of the home, your share of property taxes, and insurance. All the while, you can take the lump sum we pay you for your equity and use it to pay down debt.
Balance offers the flexibility homeowners need to renovate their homes, consolidate debts, and improve their credit and financial situation. This paves the way for homeowners to refinance down the line and regain complete ownership of their property when they’re ready.
It’s possible to qualify for certain cash-out refi opportunities, even if you have a high debt-to-income ratio. But you may want to consider other options if you want to improve your DTI ratio over time.
This is where working with Balance may help. We'll replace your monthly mortgage payments and give you the equity you need to fund personal or credit card debt repayments. By using your equity to pay down your current debts, you'll boost your debt-to-income ratio and ensure that you qualify for future financial opportunities.
Get in touch with one of our representatives today to learn more.