The Quick Read: The lender sizes your loan, not the contractor. Start with the bid, add a cushion for surprises, add the costs of the loan itself, and stack all of it on top of your current mortgage payoff. Then test that total against the loan-to-value cap on your home. If it fits, you can ask for that amount. If it doesn’t, the scope or the funding source has to change.
Here is the one-line formula: payoff + financed closing costs + bid + contingency = required loan. Compare that number to the leverage cap times the appraised value. Everything below walks through each piece, including where the formula breaks.
Key Terms Defined
Bid: a contractor’s written price for a defined scope of work. An itemized bid separates labor from materials.
Contingency: extra money set aside for surprises, such as rot behind a wall or a code upgrade. It is a cushion, not a bonus.
Payoff: the balance on your current first mortgage, which the new loan must retire.
Loan-to-value (LTV): the new loan divided by the home’s appraised value. An 80% cap means the total loan cannot exceed 80% of value.
As-is value: what the home is worth today, before the work. A plain cash-out refinance is sized on this number.
Rolled-in closing costs: loan costs added to the balance instead of paid out of pocket.
Allowance: a placeholder amount in a bid for something not yet chosen, like tile or fixtures. Allowances are where bids drift upward.
What Is the Ceiling on a Cash-Out Refinance?
On a conventional cash-out refinance of a one-unit principal residence, the ceiling is 80% LTV. For two- to four-unit principal residences, second homes and investment property, it is 75%. Across the wholesale programs Lendmire places files with, that is the box you are working in. All of it is subject to lender guidelines and full file review.
The key point is that the cap covers the whole loan. It is not extra headroom for the contractor. Your payoff, your closing costs and your renovation money all share the same 80%.
There is one narrow exception worth knowing. One wholesale lane reaches 89.99% LTV with no mortgage insurance. It needs a 680 score, a 50% ratio, a thirty-year fixed rate, a primary residence and a conforming balance. It carries its own six months of seasoning. In Texas, a cash-out on the homestead is capped by the state constitution at the agency figure, so that lane is not written there. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.
Seasoning is the waiting period before you can refinance. The loan you are paying off must be at least 12 months old, counted note date to note date. A borrower must also have been on title for six months. Delayed financing, inheritance and legal-award exceptions exist. Those two clocks can block a recent buyer who wants to refinance and renovate right away.
How Do You Size a Cash-Out Refinance for Contractor Bids, Step by Step?
Work it like a worksheet. Eight steps, in order.
1. Collect itemized bids. Get at least three, with labor and materials separated. Itemized bids make it easier to see where each contractor’s scope differs.
2. Normalize the bids. A low number can hide a thin scope. Line them up on the same list: demolition, permits, disposal, finishes, cleanup. Check what each one excludes. Note every allowance, because allowances are the soft spots.
3. Pick the number to size on. Use the most credible bid, not the lowest. If two bids are close and one is far lower, treat the gap as a question to answer, not a discount to bank.
4. Add contingency. More on this in the next section.
5. Add financed costs. These include permits and design fees if you are rolling them in, plus the closing costs of the new loan.
6. Add the payoff. Your current first mortgage has to be retired at closing.
7. Total the stack. That is your required loan.
8. Test it. Divide the required loan by the appraised value. If the result is at or under the cap, the request fits. If not, jump to the ceiling section above.
One more input matters: your own cash. If you plan to pay part of the project from savings, subtract that from the bid before you stack. Every dollar you fund yourself is a dollar you don’t borrow, pay interest on, or press against the cap.
How Big Should Contingency Be?
Set contingency by project risk, not by a favorite percentage. A cosmetic refresh on a newer home needs a thin cushion. Work behind the walls, such as plumbing, electrical, water damage or mold, calls for a thick one. Older homes call for more than newer ones.
Bid type changes the answer too.
| Bid type | What drifts | Cushion lean |
|---|---|---|
| Fixed price, full scope | Change orders only | Lower |
| Allowance-heavy | Finish selections | Higher |
| Cost-plus (you pay actual costs) | Everything | Highest |
| Hidden-condition work | Discovery after demo | Higher |
A plain cash-out refinance has no contingency requirement. The money arrives at closing and you manage the contractor. Nobody checks your math. That is freedom, and it is also the risk. In a plain cash-out you are the one insuring against overruns.
Renovation loans work differently. Leftover funds can go to additional elective repairs or reduce the principal balance. On FHA’s Standard 203(k) renovation loan, HUD‘s knowledge base says a contingency reserve is always required. It is optional on the Limited version.
Here is a decision rule that beats a single percentage. Set contingency high enough that a plausible surprise will not stop the job. Then write a cut list: the items you will drop first if the cushion runs out. A cushion with no cut list is just hope.
Should You Borrow the Contingency or Hold It in Savings?
Honestly, it is a genuine tradeoff. Borrowing it is simple. You close once, the money is there, and you do not drain savings. The cost is that the balance rises, and so does the monthly payment, even if you never spend the cushion. The lender reviews your file on the full new balance, so the unspent reserve still counts against your debt-to-income ratio.
Holding it in savings keeps the loan smaller and the cap looser. The risk is that cash goes elsewhere, or isn’t there when the contractor finds the rot.
A split often works well. Borrow the cushion that the cap comfortably allows. Keep a small closeout reserve in savings for the final walkthrough and the punch list. If borrowed money is left over, you can generally apply it to your principal.
Worked Example: A Bid That Fits
These are modeled assumptions, not market data, and no dollars are involved. Express everything as a share of the home’s appraised value.
Say the payoff is 55% of value. Closing costs rolled in come to 2% of value. The bid is 12% of value. Contingency is 15% of the bid, which is 1.8% of value.
| Line | Share of value |
|---|---|
| Payoff | 55.0% |
| Closing costs rolled in | 2.0% |
| Bid | 12.0% |
| Contingency (15% of bid) | 1.8% |
| Required loan | 70.8% |
| Cap (one-unit primary residence) | 80% |
| Headroom | 9.2% |
It passes with room to spare. That headroom is your safety margin if the appraisal comes in low or the bid grows.
Worked Example: A Bid That Hits the Ceiling
Now change the facts. Payoff is 68% of value. Closing costs are still 2%. The bid is 14% of value, and contingency at 15% is 2.1%.
The stack is 68 + 2 + 14 + 2.1 = 86.1% of value. The cap is 80%. You are 6.1% of value over.
You have four fixes:
- Shrink the scope. Use the cut list. Defer the finish items and keep the structural ones.
- Bring your own cash. Pay part of the bid from savings so you borrow less.
- Phase the work. Do the urgent portion now, the rest later, and fund each stage separately.
- Change the product. A renovation loan can size from the as-completed value instead of today’s value. That can reach further, though it brings escrowed draws, inspections and often a required contractor contract.
What you cannot do is ask the lender to stretch the cap. A bid larger than your equity cushion cannot be fully financed through a plain cash-out.
What If the Appraisal Comes In Low or the Bid Grows?
Stress-test the example that fit. Here is how the stack moves.
| Scenario | Required loan as share of today’s value | Result |
|---|---|---|
| Base case | 70.8% | Fits |
| Value 5% lower than expected | 74.5% | Fits |
| Bid 20% higher | 73.6% | Fits |
| Both at once | 77.4% | Fits, barely |
That last row is the one to watch. A deal that clears the cap by a few points in the base case can fail when two things go wrong at once. A plain cash-out is valued on what the house is worth now, not on the work you plan. Don’t assume the appraiser credits your remodel.
Build a margin. If your base case sits right at the cap, you do not have a plan. You have a coin flip.
Why Can’t a Limited Cash-Out Fund a Remodel?
A limited cash-out refinance, also called rate-and-term, pays off your existing first mortgage and rolls in closing costs. It allows only incidental cash back. On a one-unit principal residence it reaches 95% LTV, or 97% where the existing loan is agency-owned and the first-time-buyer program allows. That higher leverage is tempting, but it is for lowering a payment or changing a term, not for funding work. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.
Fannie Mae’s eligibility matrix lists the separate leverage caps for limited cash-out and cash-out transactions. If your transaction doesn’t meet the limited conditions, it is treated as a cash-out refinance. Take too much cash back, and you are in the 80% box.
The FHA Streamline and the VA IRRRL (interest rate reduction refinance loan) are the same kind of tool. They are streamlined rate-and-term products for existing FHA and VA loans. They are the wrong tool for pulling renovation cash.
Where Does the General Rule Break?
Several edge cases change the math.
Occupancy. A second home caps at 75% on a cash-out, not 80%. Occupancy decides the leverage.
Unit count. A two- to four-unit principal residence also caps at 75%. That is a smaller stack to work with.
Recent purchase. The six-month title rule and the 12-month rule on the existing loan can lock out a new owner. The delayed financing exception is the named workaround for some cash purchases. Fannie Mae’s cash-out refinance rules cover ownership, ineligible transactions, acceptable uses and delayed financing in one place. They also say a HomeStyle Refresh transaction is not eligible as a cash-out. Check the same page for how an unpaid PACE (property-assessed clean energy) obligation is treated, because that can change whether a cash-out is allowed at all.
VA loans. VA’s own ceiling is 100% LTV, and a financed funding fee counts inside it. Many lenders set a lower cap as their own overlay. Ask for the specifics on your file.
FHA cash-out. The cap sits below 100% of value, and mortgage insurance applies. Ask for the details on your file.
Mortgage insurance. On conventional loans above 80% LTV, mortgage insurance is required. You can ask to cancel it at 80% of original value. The servicer must end it at 78%. A plain cash-out at 80% sits right at that line. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
Contractor rules. Renovation programs have the lender review the contractor and require a written contract. Doing the work yourself is generally restricted. A plain cash-out has none of that, but it also has none of the protection.
When Is Cash-Out the Wrong Tool?
Sometimes a different structure fits better.
| Situation | Better fit | Why |
|---|---|---|
| Bid exceeds the equity cap | Renovation loan | Can size from as-completed value |
| Costs uncertain and phased | Renovation loan or a line of credit | Draws match the work |
| Small project, low current balance | Cash savings or a smaller loan | Avoids refinancing everything |
| Low payoff, large equity | Cash-out | Simple and fits under the cap |
| Existing loan has a low rate | Keep it; borrow separately | A refinance replaces the whole loan |
That last row is the one many owners skip. A refinance replaces your entire loan, not just the part you need. If your current loan has terms you like, a cash-out resets all of it. Weigh that against borrowing separately.
A renovation product escrows the funds. The lender advances a portion at the start for materials or fees, then releases the rest after inspections. That discipline is a feature if you worry about overspending, and a nuisance if you want a lump sum.
How Do You Pay the Contractor?
Don’t pay in one lump. Deposit, milestone, completion. Tie each payment to something you can see.
One timing trap deserves attention. For a refinance of your primary residence, federal rules give you a right to cancel. The CFPB explains that it covers most non-purchase-money mortgages and gives you three business days. Business days include Saturdays but not Sundays or legal public holidays. You can cancel within that window for any reason.
The practical point is that you should not schedule contractor deposits against money that has not been released yet. Plan the first payment after the window ends.
What Should You Collect Before Asking for a Quote?
Bring this to the conversation:
- Two or three itemized bids, with scope, exclusions and allowances marked.
- Your current mortgage statement, so the payoff is known.
- A realistic estimate of your home’s value today.
- The amount of your own cash you plan to contribute.
- A cut list, ranked by what goes first.
- Your plan for the cushion: borrowed, saved, or split.
Be wary of anyone pushing you to commit before the numbers are in writing. The CFPB’s closing checklist notes that scams from home-improvement contractors are common, and it advises settling into your new budget before taking on major non-essential projects.
Taxes are the last piece. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Frequently Asked Questions
Can I borrow 80% of my home’s value plus the contractor’s bid?
No. The 80% is a cap on the total loan, which already includes your payoff and closing costs. Whatever is left after those two is what you have for the work. If the bid and cushion don’t fit in that remainder, you shrink the scope, add cash, or look at a renovation product.
Does contingency belong in the amount I borrow?
It can, and many owners do it that way. The tradeoff is a higher balance and payment even if you never touch the cushion. A split often works: borrow part, hold a small reserve in savings. Just remember the lender reviews your file on the whole new balance, so test your debt-to-income ratio with the cushion included.
What happens if the appraisal comes in low?
The cap applies to the lower value, so the largest allowed loan shrinks. If your stack was close to the cap, it may no longer fit. That is why a margin of several points of value matters. Rerun the stack with a lower value before you commit to a contractor schedule.
Can I use a limited cash-out refinance to fund a remodel?
No. A limited cash-out allows only incidental cash back. Exceeding that makes it a full cash-out, with the lower cap. It exists to pay off the existing first mortgage and closing costs, not to put renovation money in your hands.
Do I get the money the day I sign?
Not on a primary-residence refinance. The three-business-day right to cancel runs first. Plan your contractor deposits around it.
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. HUD
2. Fannie Mae Eligibility Matrix
3. Fannie Mae Selling Guide B2-1.3-03, Cash-Out Refinance Transactions
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: Should a Homeowner With a Low First Mortgage Skip the Cash-Out Refinance? · Can a Builder Use Mixed Deposits to Cash Out a Paid-Off Home? · How to Cash-Out Refinance a Luxury Home After a Company Sale
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Important disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage brokerage. Lendmire is not a direct lender, depository institution, or financial advisor. All loan inquiries are subject to lender underwriting; this article does not constitute a commitment to lend. Rates, terms, and program guidelines are subject to change without notice and vary by borrower profile, property type, and state. Information in this article is general in nature and is not financial, legal, or tax advice. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.