Refinancing your mortgage: Requirements explained

When you refinance your mortgage, you replace your existing loan with money from a new mortgage to achieve a particular financial goal. Many homeowners refinance to reduce their monthly payment. You also can refinance to lengthen or shorten your loan term, borrow money, or get rid of mortgage insurance.

There plenty of reasons refinancing your mortgage can be a smart money move. To determine if refinancing is right for you, you’ll need to know the type of refinance you’re looking for and the eligibility requirements.

Understanding requirements for refinancing

Refinancing means you pay off your current mortgage with the funds from a new loan. Many homeowners refinance to get a lower interest rate and reduce their monthly payment. Another common reason to refinance is to borrow equity with a cash-out refinance. With this option, you pay off your mortgage with a larger loan and keep the difference.

Reasons to consider refinancing

Homeowners commonly refinance as a way to:

• Get a lower interest rate and monthly payment
• Change their loan term
• Switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage
• Borrow their equity to pay for home repairs or renovations
• Pay down high-interest debt

Mortgage refinance requirements by type

Lenders have different refinance requirements. To make it simple, we’ve summarized the general home mortgage refinance requirements based on loan type.

What do you need to refinance your home?

The requirements you need to meet will also depend on the type of refinance you choose. For example, some conventional mortgages can be refinanced as soon as 30 days after closing. However, if you’re looking to take cash out, you’ll have to wait at least 12 months. An FHA Streamline refinance can be done as soon as 7 months after closing, but an FHA cash-out refinance can’t be done until 12 months. Here is a deeper look into what you’ll need to refinance your mortgage.

1. An adequate credit score

Your credit score directly affects your ability to refinance. Your credit score is a number from 300 – 850 that represents your creditworthiness. Lenders look at your score to determine how likely you are to repay your debts and what mortgage rate to offer you. Minimum credit scores vary by refinance type and lender. If you're worried about qualifying for a refinance with your current credit score, know there are strategies for refinancing with bad credit.

Conventional refinance credit score requirements:

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

FHA loan refinance credit score requirements

Rocket Mortgage® requires a minimum 580 credit score to qualify for an FHA loan refinance – regardless of the refinance type. Some lenders have a higher credit score minimum for a FHA loan cash-out refinance – typically 620.

FHA Streamline refinance credit score requirements

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 continue with a no-appraisal refinance in many cases. Since you’ve already proven you’re a creditworthy 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 VA does not set a specific minimum credit score, but lenders set their own – typically 620 – 640. The VA does not limit how much you can take out with a VA cash-out refinance, though many lenders require that you leave at least 10% equity in your home.

VA IRRRL credit score requirements

The VA loan program offers a refinance streamline program called an Interest Rate Reduction Refinance Loan. Rocket Mortgage requires a minimum 580 credit score to proceed with a VA IRRRL. If you want a VA IRRRL with Rocket Mortgage but you’re switching from a different lender, you'll need a minimum credit score of 600.

Jumbo loan refinance credit score requirements

The credit score needed to refinance a jumbo loan varies by lender and by loan type. The typical minimum credit score to qualify for a 30-year fixed jumbo loan refinance is 680. Some lenders may require up to 740 for 15-year fixed loans or 720 for investment properties.

2. 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 you own, which is the amount you’d get if you sold the house and paid off your mortgage. As you pay off the principal balance of the mortgage, you build equity.

20% equity or more

Generally speaking, lenders typically require you to have at least 20% equity in your home to refinance. Most mortgage lenders allow you to borrow up to 80% of their home’s value. Although, if you’re refinancing with a VA loan, your lender may allow a higher loan-to-value ratio. At Rocket Mortgage, you can cash out up to 100% of your equity with a minimum 620 credit score.

Under 20% equity

If your equity is under 20% and you have a good credit rating, you may still be able to refinance. However, you might have to settle for a higher interest rate and pay for mortgage insurance. Still, it can be worth refinancing even if you don’t have much equity if interest rates have dropped significantly since you closed on your mortgage.

Interest-reduction FHA Streamline refinance loans have no equity requirements. You do need 20% equity for a cash-out refi in most circumstances.

3. Limited other debts

Your debt-to-income ratio also affects your ability to qualify for a refinance. Your DTI ratio reflects how much of your income must go toward your existing debt. You can calculate your DTI ratio by adding up your total minimum monthly debt and dividing that number by your gross monthly income.

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

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

Many lenders require that your DTI ratio not exceed 50%  to be eligible for a refinance. At Rocket Mortgage, you can refinance a conventional loan with a maximum DTI of 65%.

4. Money to cover closing costs

The cost to refinance will depend heavily on your closing costs. Most closing costs include loan origination fees, appraisal fees, prepaid property taxes, title fees, and credit check fees. You can expect your refinance closing costs to run anywhere from 2% – 6% of the total loan amount. Some lenders, including Rocket Mortgage, will let you roll all your closing costs into the new mortgage so that you don’t have to come up with the money up front.

5. Established income

Just like when you took out your original mortgage, your lender will look at your income to confirm that you have enough money coming in to afford your new mortgage. You can expect to be asked to provide the following documents:

• W-2s
• Tax returns
• 1099s
• Employment history
• Income history
• Pay stubs (past 2 – 3 months)
• Profit-and-loss statements (if you’re self-employed)

FAQ 

Let’s take a closer look at some frequently asked questions surrounding mortgage refinance requirements.

What are the income requirements for refinancing a home?

Lenders assess your income stability and debt-to-income ratio to determine whether you can afford your mortgage. Documents like W-2s, pay stubs, and tax returns can help your lender verify your income and help to provide proof that you’ll be able to repay your loan.

What credit score do you need to refinance your home?

Credit score minimum requirements vary depending on loan type. For a conventional loan refinance, you’ll usually need a credit score of 620. To refinance an FHA loan with Rocket Mortgage, you’ll need a score of 580, and the same goes for VA loan refinances and VA IRRRLs. For jumbo loan refinances, expect to qualify with a minimum score of 660 – 680.

What disqualifies you from refinancing?

Homeowners can be disqualified from refinancing because they have a low credit score, not enough equity, or too much debt. If your DTI ratio is above your lender’s maximum allowed percentage, you may not qualify to refinance your home. If you’ve missed payments on your mortgage, that can also disqualify you from a refinance.

What is needed at closing for a refinance?

At your refinance closing, you’ll need to bring a government photo ID and a cashier’s check or wire transfer to cover your closing costs.

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

To move ahead with a refinance, you need to have a current homeowners insurance policy on your home. It should have 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 you need title insurance when you refinance?

Yes, you do, but you might already have this coverage from when you first bought the home. A title insurance policy lasts as long as you own the home. This coverage protects against any liens or claims against the property. There’s a separate title policy that protects the lender. So, if you switch lenders when you refinance, you’ll have to switch to their title insurance policy.

What is the general rule for refinancing?

Refinancing is most beneficial when it lowers your interest rate or allows you to borrow needed money with favorable terms. Just be sure you plan on owning the home long enough to recoup your closing costs.

Is it hard to get approved for a refinance?

Approval depends on factors like credit, equity, and debt-to-income ratio, but good financial standing makes it easier. If your financial situation hasn’t worsened since you first took out your mortgage and you’ve built enough equity, it shouldn’t be much more difficult to get approved for a refinance.

The bottom line: Know what you need to refinance a home before applying

Refinancing your existing mortgage can help you save money or borrow money with without having to make an extra payment each month. However, you’ll need to ensure that you meet all requirements beforehand.

Rocket Mortgage is ready to guide you through every step of the refinancing process. Fill out an online application today to find out which refinancing options you qualify for.