Refinance Requirements: 6 Boxes You’ll Need To Check

Are you thinking about refinancing? Whether you're looking for a new lender or using your existing lender, you must meet the refinance requirements to get approved. They might be stricter than you think.

Check off these six boxes before you apply for a new loan.

Why Refinance?

Homeowners refinance for many reasons, including lowering their monthly mortgage payment, paying off a mortgage early, or tapping into a home's equity. Refinancing means replacing a current mortgage with a new mortgage.

You might save money on your monthly payment or increase it depending on why you refinance. For example, borrowers who lower their interest rate and refinance only their outstanding loan amount may have a lower payment. However, borrowers who borrow from their home equity or shorten their loan term may have a higher monthly payment.

If you're considering refinancing, use our refinance calculator to see how much you can save.

What Do I Need To Refinance My Home: 6 Requirements

Each lender has different refinance requirements. Understanding what's needed to refinance a house can help you prepare to get approved for the process.

Check out this table for some general guidelines, then read more about them below.

Note: These numbers are guidelines. Your exact requirements can vary depending on your lender, refinance type and your own financial health.

1. Credit Score Minimums

When applying to refinance your mortgage, lenders first consider credit scores. Each loan program has a minimum credit score requirement, but lenders also look at your credit history. For example, most lenders won't approve your request to refinance if you have a history of late or unpaid mortgage payments. They want financially responsible borrowers.

Before applying to refinance a loan, get a copy of your credit report, and check it for errors or any issues you can clear up before applying.

2. Loan-To-Value (LTV) Ratio Maximum

If your credit score passes the mortgage program's requirements, lenders next consider your loan-to-value ratio. This compares the amount of your outstanding loan to the home's value.

For example, if your home is worth $300,000 and you have an outstanding loan balance of $200,000, your LTV is 67%, and you have 33% equity in your home. The home equity is the portion of the home's value you own, and if you sold the house today, it’s the amount of money you'd receive after paying off your loan.

Each refinance program has a maximum LTV. It's best to be at or below this number for the best chance of approval.

3. Debt-To-Income (DTI) Ratio Maximum

Your debt-to-income ratio is also essential to get approved for refinancing your mortgage. Your DTI measures your monthly obligations to your gross income (income before taxes).

Lenders must determine your DTI to ensure you can afford the loan. The Consumer Financial Protection Bureau makes lenders determine beyond a reasonable doubt that borrowers can afford a loan. This means they must check your paystubs, W-2s and possibly your tax returns.

Most loans require a DTI of 36% – 50% to prove affordability.

4. Assets Required

Assets aren't a top concern for lenders, but most will ensure you have enough cash for closing costs, plus savings for reserve funds.

All borrowers pay closing costs when they refinance their mortgage. The only exception is if there's room in your loan-to-value ratio and the lender allows you to wrap the costs into your loan. However, this can increase your monthly payment, so consider this option carefully.

Sometimes lenders also want reserves, or money in a liquid account to cover your mortgage payment. This is especially important for jumbo loans. Most lenders require one year's worth of expenses to cover the higher loan payment.

5. Income Verification

Lenders must verify your income to ensure you can afford the loan as a part of the refinance requirements. The CFPB requires lenders to verify income beyond a reasonable doubt. This means providing official income documentation, including paystubs, W-2s and tax returns if you're self-employed.

Lenders use this information to ensure you have a solid history of earning your current income and that your employment will continue for the foreseeable future since a mortgage is a long-term commitment.

6. Appraisal Requirements

Lenders need to know your home's value just like they did when you bought it. A refinance appraisal determines the home's value. This allows lenders to refinance your mortgage, whether you want to reduce your interest rate or take out a larger loan.

The refinance appraisal is especially important for a cash-out refinance because you borrow more money than you currently owe. Lenders must ensure there's enough equity in the home to let you borrow against.

What Do I Need To Refinance My Home: Cash-Out Refinance

What Are Cash-Out Refinances?

Cash-out refinances provide access to your home's equity without making you sell your home. You can borrow more than you currently owe and receive the difference between the new loan amount and what you owe in cash.

Most lenders have stricter requirements for a cash-out refinance because of the higher loan amount and higher risk lenders take lending you the money.

You can use the funds for any purpose, but most borrowers use the funds for home improvements, debt consolidation, medical expenses, college tuition, or paying for a wedding.

Why Are Cash-Out Refinances Treated Differently?

Cash-out refinances put lenders at a higher risk of default because you borrow more money. As a result, lenders look closely at your mortgage payment history and overall credit habits to ensure you qualify.

They may require higher credit scores, lower debt-to-income ratios or lower LTVs to reduce their risk of loss.

What Documents Do I Need To Refinance My Home Loan?

You probably wonder what you need to refinance your home.

Just like when you bought your home, you must provide specific documents to refinance, including:

• Paystubs
• W-2s
• 1099s
• Tax returns
• Proof of employment history and current employment
• Proof of enough assets to cover closing costs and required reserves

Requirements to Refinance Mortgage FAQ

Borrowers often have questions about the refinance mortgage requirements. Here are the most common questions we get.

Is refinancing a good idea?

Refinancing isn't for everyone. Always look at the big picture to determine if refinancing is right for you. Determine how much refinancing will cost, how much you will save and if it's worth it. If you don't have excellent credit, a low debt-to-income ratio or enough equity in the home, you may want to wait.

It's also vital to determine your break-even point or when the savings you make when refinancing will make up the closing costs to refinance your loan.

What if my credit score is lower now than when I got my mortgage?

You don't need perfect credit to refinance, but the higher your credit score is, the better terms you'll get. However, there are refinancing options for homeowners with bad credit. Also, if you need to lower your payment or change your loan's term, there are options available.

Why do I have to close when I already own my home?

Even though you own the home, a mortgage closing is necessary to sign the required paperwork. There is a new mortgage deed and note when you borrow a new loan. The new lender takes the first lien position, and all documents must be properly recorded with the county to protect the lender's rights.

Why do I need a new title search?

New lenders must ensure there aren't any liens against your property before refinancing your home. They do this by ordering a new title search. If there are existing liens, the new lender may not take the first lien position, which isn't a situation lenders allow.

The Bottom Line: To Refinance, You Might Need to Get Back in Financial Shape

Before you refinance, make sure you meet the refinance requirements. Do this by checking your credit score, credit history, income and assets. If you've become complacent in your personal finances, it's time to get back on track before applying to refinance your mortgage.

Are you ready to start your refinance application? Apply online today and get the process started.