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Mortgage Refinance Requirements

If you’re considering refinancing, you may be wondering about the mortgage refinance requirements.

When interest rates decline, refinancing your mortgage can be a good way to save money. How much you can save depends on the equity you have in your home, what your new interest rate will be, and the length of your new mortgage. The savings could be substantial.

The following overview of mortgage refinance requirements can help you decide whether you are ready to apply for a new home loan.

Credit Score

Lenders use credit scores to determine how likely people are to repay their debts. A low score may indicate that a borrower has had trouble repaying debt in the past. The higher the score, the stronger your chances are of qualifying for a new mortgage with favorable terms.

Before you apply to refinance your mortgage, it’s a good idea to check your credit score. You can obtain free copies each year of your credit reports from the three credit bureaus (Experian, Equifax, TransUnion).

A recent study concluded more than one-third, or 34%, of Americans found errors on their credit report. Because of this, it’s worth your time to review the information in your reports to make sure it’s correct. If you do find a problem, you can dispute it with the reporting bureau and possibly have it removed.

The credit score you’ll need to qualify for a new mortgage depends on the type of mortgage you are applying for. Conventional loans, for example, usually require a minimum score of 620.

Home Equity

Equity is the amount of your home that you own. For example, if you obtain a new $300,000 mortgage with a down payment of $60,000, you have $60,000 in equity.

Lenders typically prefer that you have at least 20% equity in your home before they will approve you for a new mortgage. It may still be possible to refinance with less than 20% equity, but it may result in being charged a higher interest rate, which defeats the purpose of refinancing for many.

Current Debt

Lenders want to make sure that you are not overextended when they consider you for a new loan. Examples of debts that lenders consider include:

  • Car loans

  • Student loans

  • Personal loans

  • Credit card debt

  • Home equity loans

Having existing debt doesn’t mean you can’t qualify for a new mortgage. Lenders use a metric known as the debt-to-income ratio to see if you earn enough money to repay your loans. This ratio is your total minimum monthly debt divided by your monthly income. Debt-to-income ratios of 50% or less are preferred.

Income Requirements

You will need to show proof that you have sufficient income to make the monthly payments on a new mortgage. You may be able to satisfy this requirement by showing W-2s, federal income tax returns, or other financial documents.

Asset Requirements

You will have to pay closing costs on your new mortgage, and your lender will verify that you have the necessary cash to cover the expense. This can be done by showing bank statements or other financial information.

Title Insurance

You may have already purchased title insurance when you first bought your home. Showing a copy of the coverage is usually sufficient.

Mortgage Refinancing Requirements for Different Loan Types

The specific refinancing requirements you will need to meet depend on the type of loan. The following is a brief overview of some of the most common types of home loans and their requirements.

Conventional Loan

Conventional mortgages are home loans that are not backed by the government. Interest rates for these loans can be either fixed or variable. The refinance requirements for conventional loans usually include:

  • Minimum credit score of 620

  • Verification of employment and income

  • Debt-to-income ratio below 36%

  • Minimum down payment of 3%

  • PMI insurance required for down payments of less than 20%

  • Sufficient assets to pay closing costs

Jumbo Loan

Jumbo mortgages are conventional loans for amounts above $510,400. The amount may be higher in some areas. Interest rates for these loans can be either fixed or variable. The refinance requirements for jumbo loans usually include:

  • Credit score of 700 or higher

  • Down payment of 10-20%

  • Debt-to-income ratio of 45% or less

  • Extensive documentation to prove financial health

  • Cash reserves to cover one year of loan payments

VA Loan

Offered by private lenders and backed by the Veterans Administration (VA), these low-interest loans help military personnel (active and retired) and their families afford homes. The refinance requirements for VA loans usually include:

  • Military service or the spouse of a service member who died in the line of duty or as a result of a service-related disability

  • Minimum credit score of 640

  • Proof of sufficient income to repay the loan

  • VA Certificate of Eligibility (COE)

USDA Loan

Offered by private lenders and backed by the U.S. Department of Agriculture, these popular loans have low down payment requirements and competitive interest rates. The refinance requirements for USDA loans usually include:

  • Home must be in a USDA-eligible area

  • Minimum credit score of 640

  • Maximum debt-to-income ratio of 50%

  • Total household income cannot exceed 115% of the area median income

  • The loan can only be used for the primary residence

FHA Loan

Offered by private lenders and backed by the Federal Housing Administration, these loans are popular among first-time home buyers and those who are looking for an option with the lowest credit score to refinance their mortgage. The refinance requirements for FHA loans usually include:

  • Minimum credit score of 580 with a down payment of at least 3.5%

  • Credit score of 500-579 with a down payment of at least 10%

  • Employment history of at least two years

  • The property must meet certain minimum appraisal standards

Is Now the Right Time to Refinance?

Now that you know the mortgage refinance requirements, is this the option for you?

With interest rates at historic lows, now is a great time to consider refinancing your mortgage. If you have at least 20% equity in your home, it’s worth exploring your options to find out how much you can save with a new home loan.

Not sure if now is the right time to refinance? Read more.

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