Refinancing Your Mortgage: Requirements Explained

There’s no question about it – a mortgage refinance can wield amazing power. 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.

Refinancing simply means that you replace 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 that 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 
• 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

So how soon after you buy a home can you refinance? It varies by type of refinance loan and lender.

Generally, 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 and want to do a cash-out refinance. 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.

Your credit score has a direct impact on your ability to refinance. Your credit score is a number that ranges from 300 – 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 also the mortgage interest rate you can get for your refinance.

Conventional Loan 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 in order to refinance to a conventional loan. If you have a conventional loan, you have to qualify as if you were purchasing the home for the first time.

FHA Loan Refinance Credit Score Requirements

According to FHA guidelines, you must have a minimum credit score of 580 to qualify for an FHA cash-out refinance. Most FHA-insured lenders, however, set their own limits higher to include a minimum score of 600 – 620.

You can also refinance through an FHA streamline refinance, which enables you to refinance an existing FHA loan to a lower 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 VA loan program offers a refinance streamline program as well, 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.

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 actually 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 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 your lender may charge you a higher interest rate or have you take out mortgage insurance.

There are no equity requirements for interest-reduction FHA refinance loans. You do need 15% equity for a cash-out refi.

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 is comprised of 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 you refinance your mortgage.

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 closing costs upfront, meaning you can roll all your closing costs into the new mortgage.

Once you’ve crunched the numbers and confirmed your eligibility, it's time to get down to the business of refinancing your mortgage. 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 needs this information from you as well. You’ll need to provide account statements for your mortgage, any home equity lines of credit, car loans and student loans you may have.

Proof Of Income

Your lender must look at your finances to determine the interest rate to charge on your refinance, too. Proof of income is required when you apply for a refinance, such as:

• W-2s
• Tax return
• 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 ascertain the likelihood you’ll make your payments in the future. The less risk you show, the lower your interest rate will be.

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

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

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. To ensure that you’re adequately covered, lenders may order a refinance appraisal.

An appraiser will visit your property and analyze local real estate data to determine the current value of the home. If it has increased in value, you may have to bump up your homeowners insurance coverage. Contact your insurance provider to determine whether your coverage is sufficient.

Title Insurance

As a homeowner, you’ll likely have already purchased title insurance. Title insurance is protection against loss that arises from problems connected to the title of your property. This includes liens, fraud, undisclosed heirs, unpaid real estate taxes and more.

When you initially bought your home, you likely paid a one-time premium to get title insurance that protects your property from other people’s claims to it, and lenders will often request a copy of your title insurance before completing the refinance.

Refinancing your existing mortgage can afford you a lot of 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.