Refinancing your mortgage: Requirements explained

Whether you want to reduce your monthly payment, lengthen or shorten your loan term, liquidate equity, or get rid of mortgage insurance, refinancing your mortgage can be a smart strategy. When you refinance, you replace your existing loan with a new mortgage loan to achieve a particular financial goal. Getting approved for a refinance requires a vetting process like the process of getting your original loan.

To determine if refinancing is right for you, you’ll need to know the type of refinance that would work for your goals and the eligibility requirements. You may want to refinance from an adjustable-rate mortgage (ARM) to a fixed-rate loan to make your payments more stable. You may want to reduce your payments by refinancing for a longer term. Each borrower has their own unique financial goal.

Lenders will look at your credit score, your equity position, your debt-to-income ratio, the money needed to cover closing costs, and your earnings. We’ll break down what you need to know about refinancing so you can decide if it can help your financial position.

Mortgage refinance requirements by type

Lenders have different refinance requirements. To make it simple, we’ve summarized the general home mortgage refinance requirements based on loan type.

What do you need to refinance your home?

To be eligible for a mortgage refinance, you’ll need to meet the qualification requirements. The rules for refinancing are typically the same as for an original mortgage, as you are essentially applying for a new mortgage loan. But these prerequisites can differ based on the type of refinance you choose.

Refinance timelines can vary depending on your goal. While a standard conventional refinance can happen just 30 days after closing, a cash-out refinance may require a 12-month wait. For FHA borrowers, a Streamline rate reduction is available after seven months, but you must wait a full year for an FHA cash-out loan.

Let’s take a deeper dive into exactly what you’ll need to refinance your mortgage.

1. An adequate credit score

Your credit score directly affects your ability to refinance. Your credit score is a number from 300 to 850 that represents your creditworthiness. Lenders look at your score to determine how likely you are to repay your debts and what mortgage rate to offer you. The necessary minimum credit score to refinance home loans will vary by refinance type and lender. If you're worried about qualifying for a refinance with your current credit score, know that there are strategies for refinancing with bad credit.

Conventional refinance credit score requirements:

As with your original mortgage, the higher your credit score, the lower your interest rate. Many lenders require a score of 620 or above to refinance to a conventional loan. However, if you’re considering a conforming loan, Fannie Mae and Freddie Mac have loosened their credit score requirements for this kind of mortgage.

FHA loan refinance credit score requirements

The FHA technically allows refinances with a credit score as low as 500; however, borrowers with scores below 580 are limited to a maximum 90% loan-to-value ratio. In other words, you must hold at least 10% equity in your home to qualify; if you owe more than 90% of your home's value, a 580 minimum score is needed. Some lenders have a higher credit score minimum for an FHA loan cash-out refinance, which is typically 620.

FHA Streamline refinance credit score requirements

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. This can avoid a lot of extra paperwork and enable you to continue with a no-appraisal refinance in many cases. Since you’ve already proven you’re creditworthy for an FHA-guaranteed loan through your original FHA mortgage, the streamline option can save you time and money.

Although the FHA doesn't officially require a minimum credit score for a Streamline refinance, many lenders today apply their own overlays, requiring a score of at least 600 to 620. To be eligible, you typically must primarily demonstrate a clean payment history, including six consecutive on-time payments and no more than one 30-day delinquency within the past year.

VA loan refinance credit score requirements

“VA loans do not set a minimum credit score. But many lenders often do, and most look for a credit score of at least 620,” says Realtor Tyler Vaughan.

The VA does not limit how much you can take out with a VA cash-out refinance, though many lenders require that you leave at least 10% equity in your home.

VA IRRRL credit score requirements

The VA loan program offers a refinance streamline program called an Interest Rate Reduction Refinance Loan. Rocket Mortgage requires a minimum 580 credit score to proceed with a VA IRRRL. If you want a VA IRRRL with Rocket Mortgage but you’re switching from a different lender, you may need a higher credit score.

Jumbo loan refinance credit score requirements

The credit score needed to refinance a jumbo loan varies by lender and by loan type. The typical minimum credit score to qualify for a 30-year fixed jumbo loan refinance is 700 to 720. Some lenders may require up to 740 for 15-year fixed loans or 720 for investment properties.

2. 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 you own, which is the amount you’d get if you sold the house and paid off your mortgage. As you pay off the principal balance of the mortgage, you build equity.

20% equity or more

Lenders typically require you to have at least 20% equity in your home to refinance. Most mortgage lenders allow you to borrow up to 80% of your home’s value.

“I’ve seen clients try to refinance with minimal equity, and they either can’t get approved or the terms are so bad that it’s not worth going forward with the refinance,” says Josh Katz, a CPA and personal finance expert.

If you’re refinancing with a VA loan, your lender may allow a higher loan-to-value ratio. At Rocket Mortgage, you can cash out up to 100% of your equity with a minimum 620 credit score.

Under 20% equity

If your equity is under 20% and you have a good credit rating, you may still be able to refinance. However, you might have to settle for a higher interest rate and pay for mortgage insurance. Still, it can be worth refinancing even if you don’t have much equity if interest rates have dropped significantly since you closed on your mortgage.

Interest-reduction FHA Streamline refinance loans have no equity requirements. You do need 20% equity for a cash-out refinance in most circumstances.

3. Limited debt

Your debt-to-income ratio (DTI) also affects your ability to qualify for a refinance. Your DTI ratio reflects how much of your income must go toward your existing debt. You can calculate your DTI ratio by adding up your total minimum monthly debt and dividing that number by your gross monthly income.

Lenders use DTI ratio to gauge your ability to pay back your loan. Your total minimum monthly debt is made up of the following minimum monthly payments:

• Car loans
• Student loans
• Credit card debt
• Home equity loans
• Mortgages
• Any other recurring debt 

“I see a lot of clients in my practice who don’t realize their car payment or credit card balances are keeping them from qualifying for a refinance, even though their credit score looks fine,” Katz says.

Many lenders require that your DTI ratio not exceed 50% to be eligible for a refinance. At Rocket Mortgage, you can refinance a conventional loan with a maximum DTI of 65%.

4. Money to cover closing costs

The cost to refinance will depend heavily on your closing costs. Most closing costs include loan origination fees, appraisal fees, prepaid property taxes, title fees, and credit check fees. You can expect your refinance closing costs to run anywhere from 2% to 6% of the total loan amount. Some lenders, including Rocket Mortgage, will let you roll all your closing costs into the new mortgage so that you don’t have to come up with the money up front.

“It’s often best to pay your closing costs upfront in full if you are planning to stay in the home long-term because you likely qualify for a lower rate that saves more money over time versus rolling your closing costs into the loan,” suggests Katz.

5. Established income

Just like when you took out your original mortgage, your lender will look at your income to confirm that you have enough money coming in to afford your new mortgage.

“Established income means earnings that can be documented and are likely to continue,” says Vaughan.

You can expect to be asked to provide the following documents:

• W-2s
• Tax returns
• 1099s
• Employment history
• Income history
• Pay stubs (past 2 to 3 months)
• Profit-and-loss statements (if you’re self-employed)

FAQ 

Let’s take a closer look at some frequently asked questions surrounding mortgage refinance requirements.

What are the income requirements for refinancing a home?

Lenders assess your income stability and debt-to-income ratio to determine whether you can afford your mortgage. Documents like W-2s, pay stubs, and tax returns can help your lender verify your income and help to provide proof that you’ll be able to repay your loan.

What credit score do you need to refinance your home?

Credit score minimum requirements vary depending on the loan type. For a conventional loan refinance, you’ll usually need a credit score of 620. To refinance an FHA loan with Rocket Mortgage, you’ll need a score of 580, and the same goes for VA loan refinances and VA IRRRLs. For jumbo loan refinances, expect to qualify with a minimum score of 660 to 680.

What disqualifies you from refinancing?

Homeowners can be disqualified from refinancing because they have a low credit score, not enough equity, or too much debt. If your DTI ratio is above your lender’s maximum allowed percentage, you may not qualify to refinance your home. If you’ve missed payments on your mortgage, that can also disqualify you from a refinance.

What is needed at closing for a refinance?

At your refinance closing, you’ll need to bring a government photo ID, proof of homeowners insurance, recent bank statements, any updated income documentation your lender requests, and a cashier’s check or wire transfer to cover your closing costs if you are not rolling them into your loan. You’ll also need to carefully review your closing disclosure, which indicates exactly what you are signing and paying, at least three days before closing.

What do you need to do for the homeowners insurance verification?

To move ahead with a refinance, you need to have a current homeowners insurance policy on your home. It should have enough coverage to satisfy the lender’s requirements for your refinance. Contact your insurance provider to determine whether your coverage is sufficient.

Do you need title insurance when you refinance?

Yes, you do, but you might already have this coverage from when you first bought the home. A title insurance policy lasts as long as you own the home. This coverage protects against any liens or claims against the property. There’s a separate title policy that protects the lender. So, if you switch lenders when you refinance, you’ll have to switch to their title insurance policy.

What is the general rule for refinancing?

Refinancing is most beneficial when it lowers your interest rate or allows you to borrow the needed money with favorable terms. Just be sure you plan on owning the home long enough to recoup your closing costs or that the reduction in interest rate or loan term makes financial sense for you.

Is it hard to get approved for a refinance?

Approval depends on factors like credit, equity, and debt-to-income ratio, but good financial standing makes it easier. If your financial situation hasn’t worsened since you first took out your mortgage and you’ve built enough equity, it shouldn’t be much more difficult to get approved for a refinance.

The bottom line: Know what you need to refinance a home before applying

Refinancing your existing mortgage can help you pay less in interest, lengthen or shorten your term, remove mortgage insurance, or liquidate equity. But you need to ensure that you meet all requirements beforehand, including rules related to credit score, home equity, debt-to-income ratio, closing cost funds, and income.

If you’re ready to take the next step towards refinancing², you can reach out to Rocket Mortgage³ to learn more about your options.

¹ To qualify for this offer, you must meet all standard FHA eligibility requirements. In addition, your total mortgage payment, including taxes and insurance, cannot exceed 38% of your income, your debt-to-income (DTI) ratio cannot exceed 45%, and you must have 12 months of verifiable housing history immediately prior to your application, no late payments 30 days or greater in the last 12-months, and no derogatory marks on your credit report. Not available on jumbo loans. Asset statements may be needed, no more than 1 day of non-sufficient fund fees are allowed in the most recent 2 months prior to application. Additional restrictions/conditions may apply.

² Refinancing may increase finance charges over the life of the loan.

³ Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.