The Quick Read: Sizing starts with your contractor bids, but the bids do not set how much you can borrow. The bids set the cash you need. Your home’s appraised value, your current balance and the lender’s leverage cap set the cash you can get. Your job is to make the first number fit under the second.
On a standard conventional cash-out refinance, the cap is 80% of the appraised value on a one-unit primary residence. The appraisal values the home as it stands today, not as it will look after the work. Add up the bids, add a cushion, add closing costs, add your payoff, and test the total against that cap. If it fails, you trim the project, phase it, or look at a renovation loan. Program figures here are subject to lender guidelines and full file review, and nothing here is a commitment to lend.
What Does “Sizing” Actually Mean?
Sizing means matching two numbers. One is the project need: the total cash the renovation will take. The other is the loan capacity: the most a lender will let you borrow against the home.
A contractor bid only feeds the first number. Freddie Mac’s guide says a cash-out refinance has no specific restrictions on how the proceeds are used. So the lender does not size your loan to the bid. It sizes the loan to value, credit, income and reserves.
Here is the master formula in plain words:
- Need = accepted bid + soft costs + cushion + closing costs + payoff of your current mortgage and any liens.
- Capacity = appraised value × the leverage cap.
- The deal works when need is at or below capacity.
Picture a home with a modest balance and a lot of equity. The new loan must be at or below 80% of value. Whatever sits between your old payoff and that ceiling is your gross cash. Closing costs then come out of it unless you roll them into the loan. That is the whole game. The rest of this guide is how to build each side honestly.
Step 1: Collect Bids You Can Compare
Get itemized, written bids from licensed contractors. Two or three is a sensible number. One bid tells you nothing about whether the price is reasonable.
Bids often differ for reasons that have nothing to do with price. One contractor includes permits and the other does not. One prices a mid-grade countertop and the other a premium one. One assumes the walls are sound and the other budgets for what is behind them. Before you compare totals, line the bids up scope by scope:
| Scope item | Bid 1 | Bid 2 | Bid 3 |
|---|---|---|---|
| Demolition and disposal | Included | Included | Excluded |
| Permits | Excluded | Included | Included |
| Materials allowance | Mid-grade | Premium | Mid-grade |
| Payment schedule | Staged | Staged | Large deposit |
| Subcontractors named | Yes | No | Yes |
A bid that looks cheap often just leaves things out. Size against the bid you would actually sign, after you have asked every contractor to price the same scope. If you are unsure, use the higher of the two closest bids, not the lowest.
Fannie Mae sets a useful standard here, even if you never use its renovation loan. Its renovation contract rules say the contract should itemize the work, state the agreed cost, identify subcontractors and suppliers, and tie payments to stages. A bid that cannot meet that bar is a weak number to build a loan on.
Step 2: Build the Total Project Number
The bid is the floor of your budget, not the total. Layer these on top, in order:
1. The accepted bid total.
2. Soft costs. Permits, design fees and plans, if the bid did not already include them.
3. A cushion for overruns. More on this below.
4. Living costs, if you must move out. Work that shuts down your kitchen or your only bathroom for a stretch has a cost beyond the contractor.
5. Your own cash. Subtract any savings you plan to put in. That shrinks what you must borrow.
How big should the cushion be? There is no single right answer, and no sourced universal figure. Scale it to the risk. A cosmetic refresh on a sound house needs a thin cushion. A gut renovation in an older home, or any work that opens walls, floors or foundations, deserves a much fatter one, because surprises live behind finished surfaces.
For a reference point, Fannie Mae’s renovation product requires a contingency reserve of 10% of renovation costs on two- to four-unit properties and does not require one on a single unit. The lender may raise it to 15%. That tells you how the industry thinks about risk. It is a model, not a rule for your standard cash-out.
One more cost of over-borrowing: every dollar of cushion you borrow and do not spend is a dollar you pay interest on. You can use the leftover to pay down the new balance if the lender allows it, but you will have paid closing costs on it. Pad for real risk, not for comfort.
Step 3: Add the Cost of Borrowing and the Payoff
A cash-out refinance replaces your whole existing mortgage. The CFPB describes it plainly: you take out a larger loan, pay the current mortgage, and get the rest in cash. So the new loan must cover three things at once: your old payoff, your closing costs and your project cash.
Closing costs are where people double count. You have two choices:
- Pay them out of the cash you receive. Your net cash is then lower than gross cash.
- Roll them into the new loan. The loan gets bigger, which uses more of your leverage cap.
Either way, the costs sit inside the cap. If you need a certain amount of cash in hand, you must borrow enough to cover that amount plus the costs. That is the gross-up. Count it once, in the need column, and do not subtract it again from capacity.
Also add any liens being cleared. A second mortgage or home equity line that must be paid off at closing adds to the payoff and shrinks your cash. Pull your payoff figures from your servicer, not from memory.
Step 4: Calculate the Maximum Loan
Now build the capacity side. Across the wholesale programs Lendmire works with, the conventional cash-out ceiling is 80% of the appraised value on a one-unit primary residence. It is 75% on two- to four-unit primary residences and second homes. Those match the Fannie Mae Eligibility Matrix. Occupancy decides the leverage: a home you live in gets the highest cap.
Here is the arithmetic, with no dollars, just shape. Take the appraised value and multiply by 0.80. That is the largest new loan. Subtract your payoff and your liens. What remains is gross cash. Subtract closing costs if you are not rolling them in. What remains is net cash for the project.
A few other rules shape capacity before the math even starts:
- Seasoning. The mortgage being paid off must be at least 12 months old, measured note date to note date. Fannie Mae announced that rule in a capital markets notice.
- Time on title. At least one borrower must have been on title for six months before the loan funds. Delayed-financing, inheritance and legal-award exceptions exist.
- Listing status. A home listed for sale must come off the market by the funding date.
- Reserves. Under Fannie Mae’s cash-out rules, a file run through automated underwriting with a debt-to-income ratio above 45% needs six months of reserves.
There is also a wholesale lane that reaches 89.99% LTV with no mortgage insurance. It needs a 680 score, a 50% ratio, a thirty-year fixed rate, a primary residence, a conforming balance and its own six months of seasoning. It is not available in Texas. Qualification is subject to lender guidelines and full file review.
Step 5: Reconcile Need and Capacity
Put the two numbers side by side. This is the step most online guides skip.
| Line | What it tells you |
|---|---|
| Need (project + payoff + costs) | What the plan requires |
| Capacity (value × cap) | What the lender allows |
| Gap | Positive = fits. Negative = does not |
| Binding constraint | Cap, DTI, or project size |
Ask which constraint is binding. If need is under capacity, you are limited by your project, and you should borrow only what you need. If need exceeds capacity, the cap is binding. You cannot borrow your way past it.
Debt-to-income is the other gate. The lender reviews your income and debts against the larger new payment, not your current one. A loan that fits under the 80% cap can still fail on payment. So the sizing answer is always the smaller of what the cap allows and what your income supports.
When the numbers fail, you have four moves:
- Shrink the scope. Cut the items that add the least to your daily life.
- Phase the project. Do the structural work now and the finishes later from savings.
- Add your own cash. Even a modest contribution reduces the loan.
- Move to a renovation product. More on that below.
Here is a second contrasting picture. A homeowner with a large mortgage balance and a modest equity cushion gets a bid that looks affordable. The 80% cap leaves almost no cash after payoff. The project fails on the cap, not on the bid. Checking capacity first would have saved weeks of contractor meetings.
Step 6: Stress-Test the Appraisal and the Bids
Your capacity rests on an appraisal you do not control. Run the math twice: once at the value you expect, and once at a lower one.
At the lower value, the 80% ceiling drops, and your gross cash drops with it. Decide in advance how you will respond. Cut a phase? Add savings? Walk away? A decision rule beats a panic call to the contractor.
Remember that a standard cash-out appraisal values the home as it is today. A kitchen you have not built yet adds nothing to that value. This is a common trap for people who assume the work will “pay for itself” in the appraisal.
Bids move too. Prices can change between the quote and the closing, and change orders can appear mid-project. Ask each contractor how long the quote stays valid. Build your cushion with price drift in mind.
Where a Renovation Loan Is Different
A renovation mortgage is not a cash-out refinance with a different name. Fannie Mae’s HomeStyle Renovation, Freddie Mac’s CHOICERenovation and the FHA 203(k) tie the loan to the bid and to the plans.
The key difference is the valuation. On Fannie Mae’s HomeStyle product, the lender orders an as-completed appraisal. For refinances, the loan-to-value ratio is measured against that as-completed value. Renovation costs on a refinance are limited to 75% of it. That can let a bid-funded project fit when an as-is appraisal would not.
The funds also move differently. With a standard cash-out, you get a lump sum at closing and nobody watches how you spend it. A renovation loan holds the money. Under Freddie Mac’s borrower tips, funds go out after inspections of each phase, and the lender may hold back part of each draw until the work is finished. Some of the money may be advanced early for materials. A completion report, such as Form 1004D, confirms the work at the end.
| Feature | Standard cash-out | Renovation loan |
|---|---|---|
| Valuation basis | As-is | As-completed |
| Funds | Lump sum at closing | Held, released in draws |
| Contractor | Your choice, no review | Contract and plans reviewed |
| Completion check | None | Report or appraisal update |
| Added steps | Few | Plans, inspections, report |
The tradeoff is more steps. Renovation loans typically take longer to set up and manage. The lender does not guarantee the work either. Freddie Mac’s tips say the lender does not warrant the condition of the property or the renovation, and you are still responsible for the payment even if the work is not done well.
The FHA 203(k) adds its own process. HUD’s program page describes a consultant who visits with the borrower and prepares a work write-up and cost estimate. The write-up and the bids go to the lender. HUD’s own Q&A says the standard version has a minimum repair cost and requires a consultant, while the limited version covers minor, non-structural work under a stated cap. Older material shows a smaller cap, so rely on HUD’s current page.
One note on streamlines. The FHA Streamline and VA IRRRL are refinances for people who already hold FHA or VA loans. They are built to lower the cost of an existing loan, not to put cash in your hand. They do not fund a renovation.
Where the General Rule Breaks
Sizing from the bid works in the typical case. These are the situations where it does not.
Free-and-clear homes. Fannie Mae treats a new mortgage on a home with no mortgage lien as a cash-out refinance. There is no payoff to subtract, so all of the capacity is cash.
Recent loans or purchases. The 12-month and six-month rules can block a cash-out entirely. Fannie Mae also will not treat a refinance as limited cash-out if a cash-out refinance on the same property had a note date 30 days or less before the new application.
Multi-unit homes. The cap drops to 75%, so the same equity buys less cash.
Doing the work yourself. Under Freddie Mac’s CHOICERenovation, proceeds can reimburse materials but not your own labor. Fannie Mae allows limited do-it-yourself work at the lender’s discretion. A standard cash-out has no such limit, since nobody tracks the spending.
Manufactured homes. Lower caps apply, and the renovation limit is lower too.
A low existing mortgage balance with a favorable loan. A cash-out replaces the entire loan, not just the part you need. Some borrowers instead keep the first mortgage and fund a project with a second lien. That is a different decision with its own math, and a cash-out is not always the better one.
State rules. Some states change cash-out terms. In Texas, a cash-out on the homestead is capped by the state constitution, and the wholesale no-mortgage-insurance lane is not written there. Rules elsewhere can differ too.
What the Decision Looks Like in Practice
Here is the order a working broker would suggest:
1. Get at least two scope-matched bids.
2. Build your need number, including cushion and costs.
3. Get a realistic idea of your home’s value and your payoff.
4. Test need against the cap, then against your income.
5. Stress the result at a lower appraisal.
6. If it fits, a standard cash-out may be the simplest route. If it does not, compare a renovation loan or a smaller scope.
Weigh the costs honestly. A cash-out is a new loan. The CFPB notes that it may extend your payoff time and raise your monthly payment, and that your rate and other terms change. Cash-out pricing generally costs more than a plain rate-and-term refinance. Borrowing to the cap also leaves less equity cushion if values fall; at 80%, you keep 20% equity on a one-unit home. And the loan is secured by your home.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches. The brokerage’s cash-out refinance programs page lays out the options.
Key Terms Defined
Cash-out refinance: a new first mortgage that pays off your current one and gives you the difference in cash.
LTV (loan-to-value): the new loan divided by the home’s appraised value.
As-is value: what an appraiser says the home is worth in its current condition.
As-completed value: the estimated value after planned work is finished, used by renovation loans.
Contingency: extra money set aside for cost overruns.
Seasoning: the waiting period before a loan or ownership allows a refinance.
Draw: a staged payment to a contractor, released after work is inspected.
Frequently Asked Questions
What if the bids come in higher than the cash I can get?
Then the cap is binding, and you have four options: shrink the scope, phase the work, add savings, or look at a renovation loan sized on the as-completed value. Borrowing more than the cap allows is not an option on a standard cash-out.
What if the appraisal comes in low?
Your ceiling drops with it. At 80% of a lower value, you get less gross cash after payoff. Run the stress test before you sign with a contractor, and decide in advance what you will trim.
Should I roll closing costs into the loan?
You can, but the loan gets bigger and the costs still count against your leverage cap. Count them once in your need number. Rolling them in preserves your savings but reduces how much cash remains for the project.
How much contingency should I add?
Scale it to the risk. A cosmetic update on a sound home needs little. Work that opens walls or touches structure needs much more. Fannie Mae’s renovation product requires 10% on two- to four-unit homes and lets the lender raise it to 15%, which is a useful model but not a rule for a standard cash-out.
Can I use a standard cash-out and do the project in phases?
Yes. Because a standard cash-out pays you a lump sum at closing with no draw schedule, you control the timing. That freedom also means no one inspects the work for you, so hold the funds in a separate account and pay contractors by stage.
For your own numbers, request a scenario review with Lendmire.
For current guidelines and terms, see Lendmire’s refinance programs page.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage brokerage serving homeowners and home buyers in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending channels; Lendmire brokers the financing and the lender underwrites each application. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Freddie Mac Guide 4301.5, Cash-out refinance
2. Fannie Mae B5-3.2-06 Renovation Contract
3. Fannie Mae FAQs: HomeStyle Renovation
4. CFPB, Using home equity to meet financial needs
5. Fannie Mae Eligibility Matrix
6. Fannie Mae capital markets notice on cash-out refinance eligibility
7. Fannie Mae Selling Guide B2-1.3-03, Cash-Out Refinance Transactions
9. Freddie Mac CHOICERenovation Borrower Tips
This article is part of Lendmire’s Refinance series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: Is Now a Bad Time for a Cash-Out Refinance? · Should a Homeowner Use a Cash-Out Refinance for a Renovation? · Cash Out Refinance Investments
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Disclosure information. Lendmire is a state-licensed mortgage brokerage under NMLS# 2371349. Lendmire is not a depository institution, direct lender, or financial advisor — all loans referenced are placed through wholesale lender partners and are subject to each lender's underwriting standards. This article is provided for general informational purposes and is not a commitment to lend, nor does it constitute financial, legal, or tax advice. Loan programs, terms, rates, and qualification standards change without notice and depend on borrower profile, property type, and the state in which the subject property is located. Equal Housing Opportunity provider. NMLS Consumer Access: nmlsconsumeraccess.org.