Refinancing Your Mortgage: Requirements Explained
There’s no question about it – refinancing 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 you can take if you’re thinking about a refinance is to know whether you’re eligible and whether you’re prepared for the process. Read on to make sure you have all the tools in your toolbox before you get started.
You’ve Owned The House Long Enough
Refinancing simply means that you replace your existing mortgage with another mortgage with a different rate and term. You pay off your current mortgage with the proceeds from a new loan.
Homeowners usually refinance their home to negotiate a loan with a lower monthly payment, a lower interest rate or to change their loan type from an adjustable rate mortgage (ARM) to a fixed-rate mortgage. 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. You can then use that cash to make home repairs or renovations or even 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 six 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 between six months and a year for a cash-out refinance after you buy a property with an FHA loan.
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 – 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). An IRRRL doesn’t require a minimum credit score.
Current 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 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.
A general rule of thumb is that you should have at least 20% equity in your home if you want to refinance. 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.
If you want to get rid of private mortgage insurance, you’ll 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.
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. 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 and any other recurring debt you might have. Lenders use the DTI to gauge your ability to pay your home loan.
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.
Affording The 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® by Quicken Loans®, won’t require closing costs upfront, meaning you can roll all your closing costs into the new mortgage.
Your Finances Are On Hand
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 has to look at your finances to determine the interest rate to charge on your refinance, too. Proof of income, including W-2s, tax returns and 1099s, is required when you apply for a refinance. More specifically, lenders require your past two or three months of pay stubs, and that applies to co-borrowers on the loan as well.
Lenders will take a detailed look at your past employment and income history and will try 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 need to provide a few more items. Your lender will need your federal income taxes for the past two years as well as profit-and-loss statements.
Homeowners Insurance Verification
In order 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 an 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.
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, etc.
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® by Quicken Loans® is ready to guide you seamlessly through each and every step.
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