Refinance Requirements: What To Know

Refinancing your mortgage can lower your interest rate and monthly payments or even allow you to tap into your home’s valuable equity. But before this happens, you’ll need to meet the lender’s refinance requirements.

Let’s look at what you’ll need to qualify for a mortgage refinance.

When To Consider Refinancing Your Home Loan

What it means to refinance a home loan is that a lender replaces your old mortgage with a new one. The lender uses the new mortgage to pay off the old one. In most cases, the new mortgage has more favorable terms, such as a lower interest rate.

There are different refinances available depending on the borrower’s situation and eligibility. For example, homeowners can refinance with a cash-out refinance, which allows them to tap into their home equity. Some of the key reasons to consider refinancing a home loan include locking in a lower interest rate, switching from an adjustable-rate mortgage to a fixed-rate mortgage, changing the mortgage terms to make t shorter or longer, getting rid of private mortgage insurance, canceling FHA mortgage insurance premiums or cashing out some home equity.

What You Need To Refinance Your Home

To refinance your home loan, you’ll need to meet the lender’s refinance requirements. This typically consists of a decent credit score, a low debt-to-income ratio, suitable home equity, an appraisal, funds to cover closing costs and certain documentation.

Consistent Mortgage Payment History

Lenders require borrowers to have a history of paying their mortgage on time to qualify for a refinance. If you’ve missed payments, you’ll need to catch up before considering a mortgage refinance. Late payments or, worse, missed payments or default, indicate a greater level of risk. Making on-time payments shows the lender that you may be less of a risk, and it can also positively impact your credit score.

A Decent Credit Score

You’ll need to meet the lender’s minimum credit score requirements on the loan you’re refinancing to. The lender will pull your credit history to see your FICO® score, which ranges from 300 – 850. Your credit score is calculated based on your payment history, amounts owed, length of credit history, new credit and credit mix.

Anything 620 and higher is typically considered high enough to qualify. Although a lower credit score may qualify you for a mortgage refinance, it may be difficult to get a loan with a favorable interest rate. The higher your score, the lower mortgage rate you’ll likely qualify for.

If you do have bad credit, another option is to apply with a nonoccupying co-client. This is someone who doesn’t live in the house but agrees to take financial responsibility if you default on the loan. The lender will consider both of your qualifications before approving the refinance.

A Lower Debt-To-Income Ratio

Lenders typically require borrowers to have a lower debt-to-income (DTI) ratio to qualify for a refinance. While requirements vary, most lenders prefer a DTI of 45% or less.

Your DTI compares your total monthly debt to your gross monthly income, or what you earn before taxes. The lower your ratio, the less debt you have relative to your monthly income. The higher your ratio, the more debt you have to pay each month. DTI is also split into two categories: front-end ratio and back-end ratio.

The front-end DTI includes housing-related expenses, such as property taxes, mortgage payments and homeowners insurance, while the back-end DTI includes all monthly payments. Lenders typically pay attention to the back-end DTI as it gives them a complete overview of a household’s monthly spending.

Substantial Home Equity

Lenders require homeowners to have a certain minimum amount of equity in their homes before they qualify for a refinance. As you pay your monthly mortgage, you build home equity, which is the amount of ownership a homeowner currently has in their home. This amount equals the difference between the home’s value and the remaining principal balance on the mortgage or any other liens on the property.

For example, let’s say your home is worth $400,000 and your down payment is $80,000. In this case, you have 20% equity in your home. As you pay your mortgage, your equity increases. Your home equity is also influenced by the local market. When home prices in your area rise or fall, this can impact the fair market value of your home.

Your loan-to-value (LTV) ratio compares the value of the property to the outstanding mortgage loan amount. Generally, homeowners will need at least 20% home equity to refinance.

A Home Appraisal

Home appraisals are typically required for refinances. A refinance appraisal is a professional valuation of your home. A third-party appraiser assesses the home and compares it to recently sold homes in the area to provide a professional opinion of how much it’s worth. This is like the home appraisal process when you first purchased the home.

Lenders require a refinance appraisal to confirm the home’s value and to approve the new loan amount. Similar to a purchase appraisal, a refinance appraisal protects you by ensuring you don’t borrow more money than the property is worth.

Cash For Closing Costs

Homeowners will need to have enough funds to cover upfront closing costs at the time of their refinance. Refinance closing costs typically range from 3% – 6% of the principal of the mortgage. They are fees due on closing day to cover the services for refinancing the loan, including the application fee, appraisal fee, attorney fees, plus title search and insurance.

No upfront closing cost refinancing is also possible. Instead of paying these fees upfront, closing costs are either rolled into the new home loan principal or exchanged for a higher interest rate.

Required Documents

Lenders require documents to show proof of income and insurance as well as statements of debt and assets. Here’s what your lender may ask for:

• Tax returns, W-2s and 1099s for the last 2 years
• Bank statements
• Paystubs for the last 2 – 3 months
• Copy of your recorded deed along with your title insurance
• Billing statements for accounts listed on your credit report
• Homeowners insurance policy

Mortgage Refinancing Requirements By Loan Type

Here’s a table highlighting the different types of refinancing requirements.

Required Costs To Refinance A Mortgage

There are typical costs and fees required to refinance, such as:

• Application fee: The lender’s fee for processing the application. This costs $75 – $300.
• Origination fee: The lender charges a fee to process the mortgage, typically up to 1.5% of the loan principal.
• Appraisal fee: The fee charged by the appraiser for assessing the property’s value. This costs $600 – $2,000.
• Attorney fees: A real estate attorney may charge $500 – $1,000 to review refinance paperwork.
• Credit report fee: Lenders charge $10 – $100 to run a credit report.
• Title search and insurance: A title company charges a fee for search services and protection from future claims, which typically costs between 0.5% – 1% of the loan amount.
• Closing costs: Closing costs are all the fees you pay on closing day. They normally range from 3% – 6% of the mortgage principal.

Requirements For Refinancing A Home: FAQs

Here are the most frequently asked questions about refinance requirements.

What documents do I need to refinance my mortgage?

Your lender will require certain documentation to approve you for the refinance. This depends on the lender, the type of refinance you’re seeking and your personal circumstances. Be prepared to provide tax returns, W-2s, 1099s, pay stubs, a copy of your homeowners insurance policy, asset statements and debt statements.

Do all refinances require an appraisal?

Lenders usually require an appraisal when you refinance your mortgage. In some cases, you may be able to skip the appraisal under certain circumstances.

What credit score do I need to refinance a house?

The credit score you need to refinance a house depends on the type of refinance. Most lenders require a credit score of at least 620 to refinance a conventional loan.

Is title insurance required for a refinance?

When you refinance your mortgage, you are required to purchase a lender’s title insurance. This is a title policy that protects the lender against title-related defects.

What if I don’t qualify for a refinance?

If you don’t qualify for a refinance, review the reasons why and take the necessary steps to improve your personal circumstances or financial situation. Lenders will reject your application if you have a high DTI, a lower credit score, a low home appraisal, not enough home equity or a questionable employment history.

The Bottom Line

By refinancing your mortgage, you can tap into your equity, get a lower interest rate or monthly payment or switch to a different type of interest rate or loan term. In most cases, you'll have to meet the lender’s refinance requirements, which vary by lender and loan type.

Are you ready to refinance your mortgage? Start on an application today to see if you qualify!