Refinance Requirements: 6 Boxes You’ll Need To Check
Are you thinking about refinancing? Lenders will look for a strong credit score, consider your debts and how much equity you have in your home among other requirements. Whether you’re looking for a new lender or using your existing lender, you must meet the refinance requirements to get approved.
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 your 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.
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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. Let’s take a look at some of the basic requirements, what they mean and what lenders might expect.
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.
Before applying to refinance a loan, get a copy of your credit report and check for errors or issues to clear up.
2. Loan-To-Value (LTV) Ratio Maximum
If your credit score passes the mortgage program’s requirements, lenders next consider your loan-to-value (LTV) 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. Your home equity is the portion of the home’s value that you own. If you sold the house today, equity is 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 (DTI) 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 (CFPB) makes lenders confirm that a borrower can afford a loan before it’s approved. This means they must check your pay stubs, W-2s and possibly your tax returns.
Most loans require a DTI of 36% – 50% to prove you’ll be able to make your monthly payments.
4. Assets Required
Assets will be reviewed by lenders to ensure you have enough cash for closing costs, plus savings for reserve funds.
All borrowers pay closing costs when they refinance their mortgage. The 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 which are larger loans with stricter rules. 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 is stable – since a mortgage loan is a long-term commitment.
6. Appraisal Requirements
Lenders need to know your home’s current value just like they did when you bought it. A refinance appraisal determines the home’s value. This allows lenders to refinance your mortgage based on the most up-to-date value.
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 it.
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Refinance Requirements At A Glance
Now that we’ve talked about some of the main criteria you’ll need to apply for a refinance, let’s take a closer look at the qualifications for some specific loan types.
Type Of Refinance | Credit Score Minimum | Max LTV | Max DTI | Assets Required | Income verification | Appraisal required? |
|---|---|---|---|---|---|---|
Conventional mortgage refinance | 620 | 75% – 95% | 50% | For closing costs | Yes | Yes |
FHA rate and term refinance | 580 | 80% –97.75% | Varies | For closing costs | Yes | Yes |
FHA Streamline | 580 | Varies | 37% –47% | For closing costs | No | No |
VA rate-and-term refinance | 580 | 100% | 45% – 60% | For closing costs | Yes | Yes |
VA IRRRL | 580 | 100% Unlimited | 45% – 60% | For closing costs | No | No |
Jumbo | 680 | 70% – 89.99% | 45% | Sometimes reserves are required plus money for closing costs | Yes | Yes |
Note: These numbers are guidelines. Your exact requirements can vary depending on your lender, refinance type and your own financial health.
If you’re not sure which loan program is right for you, your lender can make recommendations based on your specific needs and situation.
What Do I Need To Refinance My Home: Cash-Out Refinance
Cash-out refinances function slightly differently from regular refinances, otherwise known as rate-and-term refinances. Let’s take a look at what cash-out refinances are and how their requirements can differ.
What Are Cash-Out Refinances?
Cash-out refinances provide access to your home’s equity without selling your home or taking out a second mortgage. 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 because it usually increases your monthly payments.
You can use the funds for any purpose, though many borrowers use the funds for home improvements so they can improve the value of their home. However, you could use funds for a variety of life developments including debt consolidation, medical expenses, college tuition or even paying for a wedding.
Why Are Cash-Out Refinances Treated Differently?
Cash-out refinances are a bit riskier for lenders. Taking money out of your home means larger monthly payments. As a result, lenders need to look more 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.
Cash-Out Refinance Requirements At A Glance
Since the requirements for cash-out refinances are a bit different, let’s take a look at some of the factors you need to be aware of.
Type Of Refinance | Credit Score Minimum | Max LTV | Max DTI | Assets Required | Income verification? | Appraisal required? |
|---|---|---|---|---|---|---|
Conventional Loan | 620 | 80% | 36% – 43% | For closing costs | Yes | Yes |
FHA | 580 | 80% | Varies | For closing costs | Yes | Yes |
VA | Usually 620 | 90% | 41% – 43% | For closing costs | Yes | Yes |
Note: These numbers are guidelines. Your exact requirements can vary depending on your lender, refinance type and your own financial health.
What Documents Do I Need To Refinance My Home Loan?
You might be wondering what paperwork 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 you have a good reason to refinance. Check how much refinancing will cost, how much you will save and if it’s worth it. If you don’t have a good credit score, 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 your refinance savings will make up the closing costs to refinance your current 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 lower interest rate and 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.
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, a new lender may not take the first lien position, which lenders don’t 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 made some mistakes in your personal finances, it’s time to get back on track before applying to refinance your mortgage.
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