If you want to take out 100% of your home’s equity, you’ll only be able to do it in one of two ways:
- VA Financing
- Subprime financing
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VA financing is for veterans of our country. The VA loan allows veterans to cash out up to 100% of their home’s equity if they qualify.
Subprime lenders also may have programs available for those that aren’t veterans of the military. Subprime lenders, also known as portfolio lenders keep the loans on their books, so they can make up their own rules. Some lenders do allow 100% LTVs with compensating factors.
The VA Cash-Out Refinance
The VA cash-out refinance is as flexible as the purchase loan you use when you bought your loan. The VA doesn’t require equity in the home, and they have flexible guidelines in all other aspects of underwriting. Their requirements include:
- 620 credit score – This isn’t a VA rule per se, but it’s the average credit score VA lenders require. They don’t want scores much lower than 620 as that signifies financial irresponsibility, which can be detrimental to a lender.
- 43% total debt ratio – Borrowers can have as much as a 43% debt ratio, which includes the new mortgage payment plus any debts the borrower already had. Some of the common debts include credit card payments, student loans, car loans, and personal loans.
- Have adequate disposable income – The VA likes to focus on a veteran’s disposable income. This is the cash you can use for daily living expenses. The VA has strict rules regarding how much disposable income each family must have based on their size and their location. The more disposable income you have, the less likely you are to default on your mortgage.
- Stable income and employment – The lender must make sure that your employment and income are as stable as possible. It’s best if you have a two-year history of employment at the same place and with increasing income. If you do change jobs, try to stick within the same industry and keep a similar income level.
That’s all the VA requires. They are flexible with their lending as long as you are an eligible veteran. An eligible veteran means that you served adequate time in the military to get the benefit. If you served during wartime, you must have served at least 90 days. If you served during peacetime, you must have served at least 181 days. If you were in the National Guard or Reserves, though, you must serve at least 6 years before you are eligible for VA financing.
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Subprime Loan Programs
There aren’t any particular guidelines for subprime loan programs. They are run by each lender, which means you could apply for loans with three different lenders and get three different answers. The best way to increase your chances of securing 100% cash-out refinance is to do the following:
- Increase your credit score – The higher the credit score that you have, the higher your chances of approval.
Your credit score shows lenders your level of financial responsibility. Generally, a credit score over 680 is considered ‘good’ and will get you the best chances of loan approval.
- Keep your debt ratio low – Your housing ratio and debt ratio are something you should watch. Your housing ratio shouldn’t be more than 30% of your gross monthly income. Your
total debt ratio shouldn’t exceed 43% of your gross monthly income. However, the lower these numbers are, the better your chances of securing 100% cash-out refinancing.
- Keep your income stable – Again, a two-year job history is important. It shows the lender that you are stable and don’t bounce around. This gives your income a little consistency because lenders can rely on it to pay your mortgage. If your income does change, be prepared to write a Letter of Explanation regarding the change and how you’ve adapted to it, especially if you make less now than you did before.
- Have reserves – If you have cash on hand, it can help your situation It seems silly to have money when you are asking to take money out of your home, but this money helps to cover your mortgage payment. Lenders like to know that you have a ‘backup plan’ should your income suddenly stop. Knowing that the mortgage can still be paid will work in your favor.
You can get a 100% LTV cash-out refinance, but only in one of two programs. If you opt for the conventional route, you can only borrow up to 80% of the home’s value. If you opt for the FHA route, you can borrow up to 85% of the home’s value.
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