There are a variety of requirements that need to be met depending on the type of refinance option you choose. 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 jumbo loan or VA loan. You’ll likely need to wait a year for a conventional or 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 continue with a no-appraisal refinance in many cases. 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. You may find that it’s worth refinancing even if you don’t have much equity if interest rates have dropped significantly since you closed on your mortgage.
There are no equity requirements for interest-reduction FHA Streamline refinance loans. You do need 20% equity for a cash-out refi in most circ*mstances.
FAQs
When a rate reduction is your goal, a good rule of thumb for a mortgage refinance, is to lower your existing interest rate by 1% or more. While a mortgage refinance is worth considering when you see this 1%+ reduction, there are other factors that need to be considered as well.
What is the 80/20 rule in refinancing? ›
The LTV limit (known as the loan-to-value ratio limit) for a single-family property is 80%. That means you need to keep a minimum of 20% equity in your home when you do a cash-out refinance.
How do you explain refinancing a house? ›
Refinancing your mortgage replaces your old mortgage with a new mortgage; one with a different principal amount and interest rate. The lender pays off the old mortgage with the new one and you are then left with just one mortgage; typically one with more favorable terms (lower interest rate) than your previous one.
Do I need 20% equity to refinance? ›
Conventional refinance: For conventional refinances (including cash-out refinances), you'll usually need at least 20 percent equity in your home (or an LTV ratio of no more than 80 percent). This also helps you avoid private mortgage insurance payments on your new loan.
What is the rule of thumb for mortgage refinance? ›
A rule of thumb says that you'll benefit from refinancing if the new rate is at least 1% lower than the rate you have. More to the point, consider whether the monthly savings is enough to make a positive change in your life, or whether the overall savings over the life of the loan will benefit you substantially.
What disqualifies you from refinancing? ›
In general, lenders expect you to have a minimum of 20% in home equity to refinance. In other words, the loan balance must be 80% or less of the home's value. If you don't have enough equity to meet the lender's requirement—especially if you want to take cash out of the home—you may not be eligible to refinance.
What not to do during refinance process? ›
Rushing in to the decision to refinance may not benefit your financial situation, so take time to avoid these eight mistakes.
- Failing to do your homework. ...
- Assuming you're getting the best deal. ...
- Failing to factor in all costs. ...
- Ignoring your credit score. ...
- Neglecting to determine your refinance breakeven point.
Orman's rule for refinancing
And, by refinancing into a longer-term loan, you're in debt for longer and have your money tied up for more years. To avoid this, Orman suggests you shouldn't extend the total payoff time of your loan beyond 30 years.
At what percentage should I refinance my mortgage? ›
Popular advice is to have at least 20% equity in your home before refinancing so you can qualify for better rates and get rid of private mortgage insurance if you have it.
How much income to refinance a house? ›
To qualify for a refinance, take a look at your debt-to-income ratio. The new monthly mortgage payment shouldn't be more than 30% of your monthly income. To refinance $400K over a 30-year fixed term with an interest rate of 3.5%, you'll need an income of approx. $6000/month.
In conclusion. Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months ...
What paperwork do I need to refinance my home? ›
Mortgage Refinance Document Checklist
- Pay Stubs. Lenders want to confirm that you're bringing in enough income to afford the mortgage. ...
- Tax Returns, W-2s And 1099s. ...
- Homeowners Insurance. ...
- Asset Statements. ...
- Debt Statements. ...
- Additional Documents.
When you apply to refinance, your lender asks for the same information you gave when you bought the home. They'll review your income, assets, debt and credit score to determine whether you meet the requirements to refinance and can pay back the loan.
At what point is it not worth it to refinance? ›
Moving into a longer-term loan: If you're already at least halfway through the loan term, it's unlikely you'll save money refinancing. You've already reached the point where more of your payment is going to loan principal than interest; refinancing now means you'll restart the clock and pay more toward interest again.
Is a down payment required for refinancing? ›
You don't need a down payment to refinance, but you'll likely have to come up with cash for closing costs. Some lenders let you roll closing costs into the mortgage to avoid upfront expenses. You can also try negotiating with the lender to waive them.
How much does it usually cost to refinance a house? ›
The cost to refinance a mortgage ranges from 2% to 6% of your loan amount, and you can expect to pay less to close on a refinance than on a comparable purchase loan.
Which bank is best for refinancing? ›
Best mortgage refinancing lenders
Bank of America: Best overall. Better: Best for online-only applications. SoFi: Best for minimum equity requirements. Ally: Best for no lender fees.
Do I lose equity when I refinance? ›
The bottom line. You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow.
What is the rule of thumb for refinancing? ›
The basics of the 1% rule of thumb is that if you reduce your current interest rate by 1% or more on a refinance, you'll save money. The good news is that's true. The even better news is that you can potentially save a lot of money even if you can drop your mortgage rate less than 1% of many loans.
What is the minimum amount to refinance a mortgage? ›
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.
Typically, a cash-out refinance is limited to an 80% loan-to-value (LTV) ratio on a single-family home. In other words, your loan can't equal more than 80% of your home's value. However, this amount can differ based on factors such as the lender you choose and some of your own personal financial circ*mstances.
How long must you own a home before refinancing? ›
You must be on the home title for at least six months for a cash-out refinance (some exceptions apply). Any time for a simple or rate-and-term refinance; after seven months for a streamlined refinance; after 12 months for a cash-out refinance (can vary by lender).
Are there any restrictions on refinancing? ›
Your DTI must be under a certain threshold to refinance — typically 43% or less, though rules vary by mortgage program. Monthly expenses counted in your DTI typically include: Housing costs (after refinancing) including your mortgage payment, property taxes, homeowners insurance, and any homeowners association fees.
Who pays closing costs when refinancing? ›
Refinancing costs
When you refinance, you are required to pay closing costs like those you paid when you initially purchased your home.
When can you back out of refinancing? ›
If you are buying a home with a mortgage, you do not have a right to cancel the loan once the closing documents are signed. If you are refinancing a mortgage, you have until midnight of the third business day after the transaction to rescind (cancel) the mortgage contract.
What is the golden rule of mortgage? ›
The 28% / 36% Rule
To use this calculation to figure out how much you can afford to spend, multiply your gross monthly income by 0.28. For example, if your gross monthly income is $8,000, you should spend no more than $2,240 on a monthly mortgage payment.
