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Refinancing Your Mortgage: Requirements Explained

Victoria Araj5-minute read

October 19, 2021

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There’s no question about it – a mortgage refinance can lead to big changes. Refinancing can allow you to borrow on your home’s equity, get rid of mortgage insurance, shrink your monthly payments or shorten the term of your loan.

The first step to refinancing is knowing if you’re eligible and prepared for the process. Read on to make sure you have all the tools in your toolbox before you get started.

Understanding Requirements To Refinance A Mortgage

Refinancing simply means replacing your existing mortgage with another one that has a different rate and term. You pay off your current mortgage with the proceeds from a new loan.

You can even use a cash-out refinance to take on a loan worth more than the amount you currently owe and get the difference in cash.

Homeowners usually refinance their home to:

  • Negotiate a loan with a lower monthly payment or interest rate, or change the loan term
  • Change their loan type from an adjustable rate mortgage (ARM) to a fixed-rate mortgage
  • Get cash to make home repairs or renovations
  • Pay down high-interest credit card debt

What Do I Need To Refinance My Home?

For cash-out refinance options, your name must be on the title of your home for a minimum of 6 months if you have a conventional mortgage, jumbo loan or VA loan. You’ll likely need to wait 6 months to a year for a cash-out refinance after you buy a property with an FHA loan.

There are also a few other refinance requirements you will need to consider before applying to your mortgage lender.

 

An Adequate Credit Score

Your credit score has a direct impact on your ability to refinance. Your credit score is a number that ranges from 300 to 850 and is used to indicate your creditworthiness.

Lenders look at your score to determine how likely you are to repay your debts. Your current credit score also determines whether you’re eligible for a refinance and the mortgage interest rate you can get.

Conventional Refinance Credit Score Requirements

Just like with your original mortgage, the higher your credit score, the better your rate. Most lenders require a credit score of 620 to refinance to a conventional loan.

FHA Loan Refinance Credit Score Requirements

According to FHA guidelines, there is no minimum qualifying credit score. However, most FHA-approved lenders set their own credit limits. Rocket Mortgage® requires a minimum 500 credit score to qualify. The credit score to qualify for a cash-out FHA loan refinance is slightly higher at 580.

You can also refinance through an FHA streamline refinance, which enables you to refinance an existing FHA loan to a lower interest rate more quickly. You can avoid a lot of extra paperwork and often an appraisal. Since you’ve already proven you are a good credit risk for an FHA-guaranteed loan through your original FHA mortgage, the streamline option can save you time and money.

VA Loan Refinance Credit Score Requirements

The Department of Veterans Affairs loan program offers a refinance streamline program called an Interest Rate Reduction Refinance Loan (IRRRL). Rocket Mortgage requires a minimum 620 credit score to proceed with a VA IRRRL.

If you're worried about qualifying for a refinance with your current credit, there are strategies for refinancing with bad credit.

Substantial Home Equity

In addition to an adequate credit score, you must have built up enough equity in your home to qualify for a refinance. Home equity is the percentage of the home’s value that you own and is the amount you would get if you sold the house and paid off your mortgage. The more equity you have, the better.

20% Equity Or More

A general rule of thumb is that you should have at least 20% equity in your home if you want to refinance. If you want to get rid of private mortgage insurance, you’ll likely need 20% equity in your home. This number is often the amount of equity you’ll need if you want to do a cash-out refinance, too.

Under 20% Equity

If your equity is under 20% and if you have a good credit rating, you may still be able to refinance, but you might have to settle for a higher interest rate or mortgage insurance.

There are no equity requirements for interest-reduction FHA refinance loans. You do need 20% equity for a cash-out refi.

Limited Other Debts

Your debt-to-income ratio (DTI) comes into play when you decide to refinance your mortgage. Your DTI ratio is expressed as a percentage and comprises your total minimum monthly debt divided by your gross monthly income.

Lenders use the DTI to gauge your ability to pay your home loan. Your total minimum monthly debt is made up of your minimum monthly payments for:

  • Car loans
  • Student loans
  • Credit card debt
  • Home equity loans
  • Mortgages
  • Any other recurring debt

Most lenders prefer that your DTI sits at 50% or lower. In general, the higher your DTI, the harder it is to qualify to refinance. If you think your DTI is too high, take steps to reduce your debt before refinancing your mortgage.

Affordable Closing Costs

It’s important to understand the amount of money required to close the loan. Your closing cost amounts can vary, but most closing costs include loan origination fees, appraisal fees, prepaid property taxes, title fees, credit check fees and more.

Some lenders, including Rocket Mortgage, won’t require you to bring money to cover your costs to the closing, meaning you can roll all your closing costs into the new mortgage.

Get approved to refinance.

See expert-recommended refinance options and customize them to fit your budget.

FAQs About Refinance Requirements

Once you’ve crunched the numbers and confirmed your eligibility, it's time to get down to the business of mortgage refinancing. It’s important to note that your lender will require you to offer up financial details and account information.

Your credit report lays out how much money you owe, but your lender also needs this information from you. You’ll need to provide account statements for your mortgage, any home equity lines of credit, car loans and student loans you may have.

What are the income requirements for refinance mortgages?

Your lender must look at your finances to determine the interest rate to charge on your refinance, and will require proof of income when you apply. You can use:

  • W-2s
  • Tax returns
  • 1099s
  • Employment history
  • Income history
  • Pay stubs (past 2 – 3 months)

Pay stub requirements apply to co-borrowers on the loan as well. Lenders use these details to make sure you can afford your mortgage payments in the future.

If you’re self-employed, you'll also need to provide:

  • Federal income taxes for the past 2 years
  • Profit-and-loss statements

What do I need to do for the homeowners insurance verification?

To move ahead with a refinance, you need to have a current insurance policy on your home that has enough coverage to satisfy the lender’s requirements for the amount of your refinance. Contact your insurance provider to determine whether your coverage is sufficient.

Do I need title insurance?

Yes, and as a homeowner, you may have already purchased a title insurance policy to protect your interests as an owner. This owner's title policy remains in effect for as long as you own the house. Title insurance is protection against loss that arises from problems connected to the title of your property. The coverage includes liens, fraud, undisclosed heirs, unpaid real estate taxes and more.

There's a separate policy that protects the lender's interests. It's good for as long as you have your loan, so each time you get a new mortgage, you'll need a new lender's title policy.

The Bottom Line: Make Sure You’ve Met All Home Refinance Requirements Before Applying

Refinancing your existing mortgage can afford you many benefits, including allowing you to borrow on your home’s equity, get rid of mortgage insurance, lower your monthly payments or shorten the term of your loan. Rocket Mortgage is ready to guide you seamlessly through every step as you get started with your online refinance.

Is your mortgage rate still over 3%?

Refinancing now could save you thousands over the life of your loan. Get started below to see how Rocket Mortgage can help.

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Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.