The Quick Read: A cash-out refinance raises your debt-to-income ratio by the amount the new, larger payment exceeds the old one, divided by the monthly income your traditional personal-income documentation shows, and because returns count income after write-offs, that income is often lower than your real cash flow. The size of the jump depends on your numbers, not on a standard figure.
- DTI means your monthly debts divided by your monthly qualifying income.
- The cash-out adds to the top of that fraction, and your deductions shrink the bottom.
- The formula is simple: added monthly payment divided by qualifying monthly income equals the points added.
- Rental properties add a third moving part, because each one’s net rent on Schedule E can help or hurt.
- Bank statement and DSCR loans measure income differently, so the same cash-out can look very different under each.
The Formula: What a Cash-Out Does to Your DTI
A cash-out refinance replaces your current mortgage with a bigger one. The new payment goes into your DTI, and the old payment drops out. The difference is what moves your ratio.
Here is the math in plain form. Take the new monthly obligation on that property and subtract the old one. Add any new debts the cash will create, such as the payment on a second rental you plan to buy. Then divide by your qualifying monthly income. That result is the number of DTI points you add.
Three things make the payment larger than many borrowers expect:
- A bigger loan balance.
- The full housing payment, which includes taxes, insurance, and any association dues, not only principal and interest.
- The loan term, since a shorter term raises the monthly payment on the same balance.
Cash used to pay off other debts works in your favor. Those payments leave your DTI at closing, so a cash-out used for consolidation can lower the ratio even though the mortgage grows. A cash-out used for reserves or a down payment does the opposite.
How Lenders Turn a Tax Return Into Monthly Income
A traditional personal-income review starts with net income, not revenue. That is the line most self-employed borrowers underestimate. Your gross sales do not count. What counts is what is left after your business expenses.
The usual sequence looks like this:
1. The lender pulls the net figure from your return. Sole proprietors use Schedule C. Pass-through owners use their K-1 income and business returns.
2. The lender typically averages two years of returns.
3. The lender adds back certain non-cash deductions and subtracts certain items.
4. The total is divided by 12 or 24 to get monthly qualifying income.
| Return item | Typical treatment |
|---|---|
| Net profit or K-1 income | Starting point |
| Depreciation, depletion, amortization | Commonly added back |
| Casualty loss | Commonly added back |
| Business use of home | Often partly added back |
| Non-deductible meals | Often subtracted |
| Declining year | Often used alone, not averaged |
Exact add-backs differ by program. Treat the table as a pattern, not a rule.
The painful part is the overlap. The deductions that lower your tax bill also lower your qualifying income. Vehicle write-offs, equipment expensing, and home office costs reduce the net figure that underwriters use. Depreciation is usually added back, so it hurts less than the other write-offs.
Tax treatment can depend on how the funds are used and how the property is held; investors should keep clear records and speak with a qualified tax professional before relying on any deduction.
Key Terms Defined
Debt-to-income ratio (DTI): your total monthly debt payments divided by your monthly qualifying income.
Qualifying income: the income figure a lender lets you use, which may differ from what you actually earn.
Add-back: a deduction on your return that the lender puts back into income because it did not cost you cash.
Schedule E: the tax form where you report rental income and expenses for each property.
Housing payment: principal, interest, taxes, insurance, and association dues on the property.
Bank statement loan: a program that is reviewed around documented income under the applicable program, using 12 months of deposits instead of traditional personal-income documentation, subject to lender guidelines.
DSCR loan: a business-purpose investor loan that qualifies primarily on property-level rental income covering the payment, subject to lender guidelines.
Worked Example: Same Borrower, Same Cash-Out
These figures are modeled assumptions, not market data. They use abstract units to keep the focus on the ratio.
Picture a self-employed owner whose traditional personal-income documentation supports 100 units of monthly qualifying income. Their monthly debts total 30 units, and 20 of those are the current payment on the property. After the cash-out, that payment becomes 32 units. Total debts become 42 units.
DTI moves from 30% to 42%. The increase is 12 units divided by 100 units of income, or 12 points.
Now change only the cash-out size:
| Cash-out size | Added payment | DTI on returns | DTI on deposits |
|---|---|---|---|
| Small | 6 units | 36% | 27.7% |
| Medium | 12 units | 42% | 32.3% |
| Large | 20 units | 50% | 38.5% |
The last column assumes the same borrower’s 12 months of deposits support 130 units of qualifying income after the lender’s expense factor. That 130 is also an assumption. In real files, the gap between return income and deposit income can be wide, narrow, or reversed. Lenders in a bank statement program apply their own expense factors to deposits, so a stronger deposit pattern does not guarantee a stronger ratio.
This example shows the lesson. The loan did not change between columns. Only the income view changed.
What Happens to Rental Income on Schedule E
Rentals can move your DTI in either direction. Traditional personal-income review uses the net result on Schedule E, adjusted for add-backs.
Enact MI’s rental income worksheet shows the two common routes. One uses Schedule E. The other uses a lease or an appraiser’s rent schedule, which is Form 1007 for single-family homes and Form 1025 for small multifamily. The worksheet also counts months in service from fair rental days. When those days are not reported, it defaults to 12 months unless evidence shows a shorter period.
On the Schedule E route, a BiggerPockets thread describes adding back depreciation, taxes, interest, and insurance, then dividing by months in service. The same thread cautions that interest is added back only when it is also counted as a liability. That prevents double-counting. Some lenders also apply a haircut to lease rent, which is a lender-specific practice.
Here is why that matters for a cash-out. Say you refinance a rental and its payment rises. If that new payment now exceeds the property’s net rent, the shortfall lands in your DTI as a debt. A rental that used to look neutral can start dragging the ratio.
Now say you use the cash to buy another rental. The new property’s payment joins the numerator too. Your DTI then rises from two sources at once, and the second one can be larger than the first.
Where the General Rule Breaks
Most of the mechanics above hold across programs. These cases bend them.
A rising income year. Averaging two years often limits how much a strong recent year helps. A big jump may count at a lower level than you expect.
A declining year. Many lenders use the lower year alone. One bad year can set your qualifying income.
Low ownership in an entity. A borrower who owns a small share of a business may avoid the full business analysis. Programs define “small” differently.
A refinanced rental with a short history. If the property has no full year of rental reporting, the months-in-service count changes the monthly net figure.
QM versus non-QM. The federal ability-to-repay framework did not set a fixed DTI cap for non-QM loans. The CFPB’s General QM rule removed the 43% DTI limit from that definition and replaced it with price-based thresholds. DTI did not vanish. A Dinsmore & Shohl analysis notes that creditors must still consider DTI when they verify income and debts. In practice, any DTI ceiling you hit comes from the lender’s program, and some non-QM programs allow a higher ceiling than conventional loans.
Ways to Bring the Number Down
The ratio responds to a handful of levers. Some work on the debt side, some on the income side.
| Lever | Effect on DTI |
|---|---|
| Take less cash out | Smaller payment increase |
| Pay off debts at closing | Removes those payments from the top |
| Add a co-borrower with income | Raises the bottom |
| Choose a different income method | Changes the bottom |
| Apply after a stronger return is filed | Can raise the average |
| Hold more reserves | Helps the file, not the ratio |
Payoff order matters if you consolidate. The debts with the highest monthly payment relative to balance free up the most DTI per unit of cash. A card with a small balance and a large required payment often beats a larger balance with a small payment.
Timing matters too. A new return year changes the two-year average, for better or worse. If your most recent year was strong, waiting for it to enter the average can help. If it was weak, it can hurt.
There is a real trade-off here. Reducing write-offs to show more income carries a tax cost, and that is a decision for you and a tax professional. Many borrowers decide that a different documentation method costs less than reshaping a return.
When Tax Returns Are the Wrong Tool
Across Lendmire’s wholesale network, the pattern is consistent. Self-employed owners with heavy deductions and a high-priced cash-out often fail on returns even when their cash flow is strong. The fix is usually a different income method, not a smaller dream.
Bank statement loans. Most programs Lendmire places files with take 12 months of business or personal bank statements. Qualifying income comes from deposit averages, with lender-specific expense factors. Personal DTI generally still applies, but it uses income derived from deposits, not from the return.
On an owner-occupied cash-out, the ceiling is typically up to 80% LTV with a fixed expense ratio, or 75% with an accountant-prepared ratio, depending on loan size and credit. On a purchase or rate-and-term refinance of a primary residence, select lenders go up to 90% LTV, but that is not the cash-out ceiling. An asset-depletion alternative, which qualifies from liquid assets, runs to about 80% LTV on a primary residence. On an investment property, cash-out tops out around 75% LTV. Loan sizes typically run from $125,000 to $3,500,000, and reserves commonly sit around 6 months of the housing payment, all subject to lender guidelines.
Occupancy decides the paperwork. An owner-occupied file is a consumer mortgage, so TRID disclosure rules apply. A bank statement loan on a non-owner-occupied rental, including a short-term rental, is business-purpose and exempt from TRID. Lendmire’s consumer mortgage licensing covers 16 states.
DSCR loans. DSCR loans are designed for non-owner-occupied investment properties. Because they are business-purpose investor loans, they are reviewed differently from a standard owner-occupied mortgage. Personal DTI is generally not the central test. The property’s rent must cover the new, larger payment, so a big cash-out can still push a rental below a program’s coverage floor. Select lenders in the network will review sub-1.00 coverage, but leverage and terms adjust. Credit, reserves, and an appraisal still apply. Lendmire’s complete DSCR loans guide covers how coverage is calculated.
A quick decision aid.
- If your DTI has room and your income is easy to document, a conventional loan may cost less.
- If your return income is thin but your deposits are strong, a bank statement program is the natural test.
- If your personal DTI is full but the rent covers the new payment, DSCR is often the better fit.
If your returns are thin, Lendmire’s guide to a self-employed landlord with thin returns goes deeper.
Cash-Out Versus a HELOC
A home equity line leaves your first mortgage untouched and adds a second payment. A cash-out replaces the first mortgage. Both add debt, so both raise DTI. The difference is which payment changes and how a given lender counts a line that may not be fully drawn. Some lenders count the full line, and others count only the drawn balance. Ask how yours counts it before you compare.
Frequently Asked Questions
Does a cash-out refinance always raise my DTI?
No. It raises DTI when the new payment is larger than the old one plus any debts you pay off. If you use the proceeds to retire several monthly debts, the ratio can fall even though the mortgage balance grows. The result depends on the payments that leave and the one that replaces them.
Why does my DTI look high when my cash flow is strong?
Traditional income documentation reports income after deductions, and underwriters generally start from that net figure. Legitimate write-offs lower your taxes but also lower qualifying income. A lender may add back some non-cash items such as depreciation, though the add-backs vary by program. Your real cash flow can be much higher than the income the file counts.
Do bank statement loans ignore DTI?
No. Most bank statement programs still apply personal DTI, using income built from 12 months of deposits and a lender expense factor. What changes is the income side of the ratio. DSCR loans are the lane where personal DTI is generally not the central test.
How do rentals affect DTI on a tax-return loan?
Each rental’s net Schedule E result, after add-backs, is compared with its payment. A shortfall goes into your liabilities, and a surplus may count as income at some lenders. A cash-out that raises the property’s payment can turn a neutral rental into a drag on the ratio.
What should I do if the number comes out too high?
Run the formula first, so you know the size of the gap. Then test the levers: a smaller cash-out, paying off debts at closing, a co-borrower, or applying after a stronger return enters the average. If the gap remains, compare a bank statement program or, for investment property, a DSCR structure. Every file is underwritten individually, and nothing here is a commitment to lend.
See How Your Numbers Work
Reach the team at 828-256-2183, or request a quote.
The investors who get surprised are rarely the ones with weak businesses. They are the ones who learned their qualifying income only after the cash-out was already planned.
For the mechanics of pulling equity out of a rental property, see Lendmire’s guide to cash-out refinance on an investment property.
For current guidelines and terms, see Lendmire’s DSCR loan programs page.
About Lendmire
As a DSCR and non-QM mortgage broker, Lendmire — NMLS# 2371349 — connects investors with wholesale lending channels across 41 markets, including Washington, D.C. The property’s rental income, not the borrower’s tax returns, is central to lender review, which works for self-employed operators and portfolios beyond four financed properties. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
Get Started
Ready to find the right loan for you?
In about 30 seconds you can review financing options available for your home or investment property. No commitment required.
Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. Enact MI – Form 1038 Rental Income Worksheet
2. BiggerPockets – How to Calculate DTI with Schedule E
3. CFPB – General QM Loan Definition
4. Dinsmore & Shohl – Analysis of the ability-to-repay rule
This article is part of Lendmire’s bank statement loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Tax Returns vs Bank Statements: Self-Employed Purchase or HELOC · How an LLC Owner Does a Cash-Out Refinance on Bank Statements · How to Choose Tax Returns or Bank Statements for a Cash-Out Refinance
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
- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.