Understanding Mortgage Refinance Requirements
Homeowners might be able to save on interest, lower their payments or shorten their loan terms when they refinance their mortgage. However, refinance requirements vary depending on why you’re refinancing and how your finances look.
Knowing the requirements to refinance a mortgage may save you money upfront and, in some cases, help you avoid the hassle of verifying your income or waiting on a home appraisal.
Mortgage refinance requirements for rate-and-term loans
The requirements for refinancing your mortgage will depend on the type of loan program you choose. Let’s take a look at standards for rate-and-term loans, which either lower your interest rate or shorten your loan term.
|Refinance program||Credit score minimum||Max LTV||Max DTI ratio||Assets required||Income verification required?||Appraisal required?|
|Conventional rate-and- term
|620||97%||45%-50%||To cover closing costs if not rolled into loan amount||Yes||Yes, unless eligible for appraisal waiver|
|FHA rate-and- term refinance||580||97.75%||43%||To cover costs if not rolled into loan amount||Yes||Yes|
|FHA streamline||N/A mortgage history only||N/A||N/A||To cover costs if not rolled into interest rate||No||No|
|VA rate-and-term refinance||No VA-set minimum, but lenders require 620+||100%||41%||To cover costs if not rolled into loan amount||Yes||Yes|
|VA IRRRL||N/A||N/A||N/A||To cover costs if not rolled into loan amount||No||No|
|USDA streamline||N/A||N/A||N/A||To cover costs if not rolled into loan amount||No||No|
Here’s a quick refresher if you don’t remember the different loan types from when you bought your home:
Conventional loans. These are non-government loans with guidelines set by Fannie Mae and Freddie Mac. When it comes to conventional refinancing, you don’t need any mortgage insurance if you have at least 20% equity.
FHA loans. The Federal Housing Administration (FHA) insures loans for borrowers with credit scores as low as 500 in some cases. Homeowners with a current FHA loan can take advantage of easy refinance qualifications of the FHA streamline program, which don’t require an appraisal or income verification. However, make sure to budget for closing costs, or ask your lender to raise your rate to cover the costs: The program doesn’t allow you to add the costs to your loan amount.
VA loans. Military borrowers with a current loan guaranteed by the US. Department of Veterans Affairs (VA) may be eligible for a VA interest rate reduction refinance loan (IRRRL). No income documents or appraisal are required.
USDA loans. Rural homeowners may be able to refinance a loan backed by the U.S. Department of Agriculture (USDA) with the streamlined assist program that doesn’t require income or appraisal documents. However, the USDA doesn’t permit cash-out refinances.
Important details about rate-and-term refinance requirements
Credit score minimums
Some mortgage companies set their own minimum credit score to refinance, even though they aren’t required by the government agencies. For example, the VA doesn’t require a minimum score, but many VA-approved lenders won’t accept less than 620.
Loan-to-value (LTV) ratio
Your LTV ratio is a measurement, expressed as a percentage, of how much of your home’s value you borrow. VA mortgage guidelines allow borrowers to finance up to 100% of the home’s price, while FHA and conventional lenders require a little bit of equity to qualify for a refinance. FHA streamline and VA IRRRL loans don’t require an LTV ratio calculation.
Debt-to-income ratio (DTI)
Lenders divide your total monthly debt, including your new mortgage payment, by your before-tax monthly income to calculate your DTI ratio. However, if you meet the home refinance requirements for an FHA streamline or VA IRRRL, you can skip this requirement.
You’ll typically pay between 2% and 6% of your loan amount for refinance closing costs. If you don’t plan to roll them into your loan amount, lenders will verify that you have enough cash assets to cover the out-of-pocket costs. This includes banking account balances, retirement account assets and stock/brokerage accounts.
Gather recent pay stubs, W-2s and federal tax returns to show proof that you meet the income requirements for a refinance mortgage. Digital lenders may be able to electronically access your earnings history from your employer, if you give them permission.
Your lender may offer an appraisal waiver if its automated underwriting system accepts your estimated home value. No appraisal is required on VA IRRRL or FHA streamline loans.
REFINANCing after mortgage forbearance
You can refinance a mortgage that was recently in forbearance and roll in the balance of past-due payments, as long you qualify and have made three on-time payments since the forbearance term ended.
CHANGES TO REFINANCE GUIDELINES IN 2021
There are some big changes coming to mortgage requirements in 2021. Here are a few:
- The DTI ratio requirement is going away. The 43% DTI ratio requirement will be replaced by a “price-based qualified mortgage definition” under the new Consumer Financial Protection Bureau (CFPB) guidelines that go into effect this year. If the annual percentage rate (APR) you’re offered is less than 2.25 percentage points below the average prime offer rate for a similar loan, the loan will be considered a qualified mortgage.
- Self-employed borrowers will need extra documentation. As businesses recover from closures related to the COVID-19 pandemic, lenders will verify the business is operational and may request profit and loss statements supported by receipts or bank statements showing income deposits.
Requirements to refinance a mortgage for cash-out home loans
You’ll typically need more equity to do a cash-out refinance. Mortgage guidelines require a home appraisal in most cases. There’s one exception: You might get an appraisal waiver if you leave 30% equity in your home after taking cash out. Be prepared for interest-rate sticker shock, though, because cash-out refinance loans typically have higher fees and rates.
Refinancing your home with government-backed, cash-out refinance loans gives you more qualifying flexibility. In the case of VA loans, that translates to more borrowing power.
Conventional cash-out refinance requirements
- Minimum 620 credit score
- Maximum 80% LTV ratio
- Maximum 45%-50% DTI ratio
- Home appraisal required to verify value
- No mortgage insurance
FHA cash-out refinance requirements
- Minimum credit score of 500
- Maximum 80% LTV ratio
- Maximum 43% DTI ratio recommended
- Home appraisal required to verify value
- 2 types of mortgage insurance
- Area loan limits apply
VA cash-out refinance requirements
- VA lenders typically require 620
- Maximum 90% LTV ratio
- Maximum 41% DTI ratio recommended, but exceptions are possible
- Home appraisal to verify value
- No mortgage insurance, but you may pay a VA funding fee
- No loan limits but lenders may have their own restrictions
Why do you want to refinance?
Before you replace your current mortgage with a new one, figure out your refinance “why.” Changing your mind in the middle of a refi may cost you time and money, defeating the purpose of refinancing in the first place.
Here are some of the most common reasons to refinance a mortgage:
Lower your monthly payment
The main purpose of refinancing for most homeowners is to lower their rate and monthly payments. Contrary to mortgage refinancing myths, there are no hard-and-fast mortgage rules about how much interest rates need to drop for you to benefit from a refinance. However, you’ll want to stay in your home long enough to recoup refi closing costs, known as reaching the break-even point.
Get rid of mortgage insurance
If you’re paying monthly mortgage insurance because you made a low down payment or took out an FHA loan, a refinance may help you eliminate or reduce private mortgage insurance (PMI).
For example, if you’ve reached 20% equity in your home, you can refinance to a new conventional loan without paying PMI. FHA mortgage insurance, however, is required for the life of the loan if you made the minimum 3.5% down payment. If you put down 10% or more, you’ll pay FHA mortgage insurance for 11 years.
Pay your off loan faster with a shorter term
If you have some room in your budget for a higher monthly mortgage payment, it may make sense to refinance to a shorter loan term such as a 15-year fixed-rate mortgage. You could save thousands of dollars in long-term interest charges, and 15-year fixed mortgage rates are typically lower than 30-year loans.
Tap equity to pay off high-interest debt or make home improvements
Home equity is the difference between your home’s value and your current loan balance, and you can access it with a cash-out refinance. By borrowing more than you currently owe, you can pocket the difference to consolidate maxed-out credit cards or make upgrades to increase your home’s value even more.
Shop for your best mortgage rates
LendingTree studies have consistently shown that borrowers receive lower mortgage rates by shopping around with multiple lenders. That’s especially true when you’re refinancing your home.
Once you’ve determined your refinance goals and decided on a loan program, follow these three mortgage refinance tips to snag your best refinance rate:
1. Get a quote from your current lender. Your current lender may make a special refinance offer to keep your business.
2. Get quotes from three to five lenders. Shop around online on a comparison-rate site like LendingTree. Or you can call lenders up and collect the information (ideally, on the same day) to see which one is the most competitive.
3. Lock in your rate. Interest rates change daily. Plan to lock in your interest rate, keep track of the expiration date and respond to lender requests quickly for documents or explanations. The sooner you close, the sooner you’ll begin saving on your refinance.