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Refinancing Your Mortgage: Requirements Explained

Andrew Dehan6-minute read

June 21, 2022

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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 to choose the right type of refinance for you.

Understanding Requirements To Refinance A Mortgage

Refinancing simply means replacing your existing mortgage loan 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.

To find out if you could benefit from refinancing your mortgage, use the calculator below to crunch the numbers. Enter in your loan amount, home value, credit score and more to see how your loan could change with a simple refinance.   

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 FHA cash-out refinance. There are limited exceptions to these rules including if you’re taking advantage of delayed financing or you’ve inherited the home.

  

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 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

FHA loans have a 500 minimum median  qualifying credit score. However, most FHA-approved lenders set their own credit limits. Rocket Mortgage® requires a minimum 580 credit score to qualify. The credit score to qualify for a cash-out FHA loan refinance is often slightly higher at 620. The exception is if you already have your loan with us and you're taking cash out to pay off debt at closing. The median credit score can be as low as 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

If you're looking to lower your rate or change your term, the minimum median qualifying credit score to get a VA loan is 580. You can also take cash out at this score as long as you leave at least 10% equity in your home after the refinance. If your median score is 620 or higher, you can cash out up to the full amount of your equity.

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 580 credit score to proceed with a VA IRRRL. If you want a VA IRRRL with Rocket Mortgage® but are switching from a different lender, you'll need a minimum credit score of 600.  

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.

It’s important to also note that most mortgage lenders only allow borrowers to use 80 – 90% of their home’s equity for a cash payment. Although, if you are refinancing with a VA loan, your lender may allow a higher loan-to-value ratio (LTV), depending on your credit score and personal situation.  At Rocket Mortgage®, you can cash out up to 100% of your equity with a minimum 620 FICO® Score.

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 Streamline 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 43% or lower. In general, the higher your DTI, the harder it is to qualify for a refinance. If you think your DTI is too high, take steps to reduce your debt before refinancing your mortgage.

Affordable Closing Costs

The cost to refinance will depend greatly on your closing costs, so 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, may not require you to bring money to cover your costs to the closing, meaning you can sometimes 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
  • Paystubs (past 2 – 3 months)

Paystub 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. However, you should take the time to ensure you meet all requirements beforehand.

Rocket Mortgage is ready to guide you seamlessly through every step of the refinancing process. Fill out an online application today to find out which refinancing options you qualify for. You can also give us a call at (833) 326-6018.

Get approved to refinance.

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

See What You Qualify For

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Andrew Dehan

Andrew Dehan is a professional writer who writes about real estate and homeownership. He is also a published poet, musician and nature-lover. He lives in metro Detroit with his wife, daughter and dogs.