To qualify for a mortgage refinance, you’ll need an adequate credit score (620 or higher for conventional loans), a debt-to-income ratio of 43% or less and to meet other lender requirements.
Mortgage loans come with qualifications to get the financing you requested and refinancing a home mortgage works the same way. The refinance qualifications are similar to your primary home loan but are often less strict.
Depending on your situation, you might need to improve your credit score or save more money for a larger down payment before being approved for mortgage refinancing.
Read on to learn everything you need to know about how to qualify for refinancing.
What is Mortgage Refinance?
A mortgage refinance is a financial product that allows homeowners to adjust the interest rate or terms of their home loan or access equity with a cash-out refinance. In most cases, refinancing is done when interest rates have fallen from where they were when the homeowner closed on the original mortgage.
Mortgage Refinance Qualifications
While you must meet a few basic qualifications when refinancing, you might already have everything you need, especially if you got your mortgage loan only a few years ago. As a general rule, refinancing has less strict requirements than getting a mortgage in the first place.
“You will still have to meet the general requirements for credit, income and meeting the appropriate debt-to-income ratio specified by the loan program,” says Reed Letson, owner of Elevation Mortgage. “Additionally, your loan may require an appraisal, and you will have to show proof of homeowners insurance.”
Here are the general mortgage refinancing qualifications for those with conventional home loans.
1: A Loan with No Missed Payments
First and foremost, you cannot refinance a mortgage loan that’s not current. This means people with outstanding payments may not qualify for refinancing. While this requirement can vary slightly between lenders, some will deny refinancing if you have a missed payment within the last 12 months. If you’re behind on mortgage loan payments, create a plan to get back in control before applying for home loan refinancing.
You could qualify for a streamlined refinance if you’re up to date on your loan and have a government-backed mortgage, like a Federal Housing Administration (FHA) loan or a U.S. Department of Agriculture (USDA) loan. With a streamlined refinance, you could close your new loan faster and without an additional credit check. However, you cannot have any missed payments on your loan account to qualify.
2: An Adequate Credit Score
When you apply for mortgage refinancing, you’re replacing your current mortgage loan with a new one that better fits your needs. This means lenders will look at your credit score and credit report when you apply for a refinance, just like when you got your first home loan.
To qualify for refinancing, you must meet your lender’s requirements. The minimum credit score needed will vary depending on the type of loan you’re applying for and your lender’s policies. Generally, you’ll need a score of at least 620 points when refinancing a conventional loan and 580 points when refinancing a government-backed mortgage loan.
RELATED: Credit Score Needed to Refinance a House Loan
3: A Manageable Amount of Additional Debt
Additional debt beyond your mortgage will reduce your chances of being approved for refinancing.
Lenders use a calculation known as a debt-to-income (DTI) ratio when they consider your ability to repay any money they lend to you. To calculate your DTI ratio, first, add up all recurring debt you pay besides your mortgage. Common sources of outstanding debt that you might need to consider include:
- Student loans
- Credit card payments
- Home equity loans and home equity lines of credit (HELOCs)
- Auto loans
- Any type of recurring debt you make payments on each month
Add your minimum account payments and divide this figure by your gross, pre-tax household income to determine your debt-to-income ratio.
Take a look at an example of how to calculate your DTI ratio. Imagine you earn $5,000 each month before taxes in your household. Each month, you pay $300 on a student loan account, $150 toward your credit card debt and $400 toward your car. This means your total recurring debt beyond your mortgage is $850. $850 divided by $5,000 is 0.17, so your DTI ratio is 17%.
Most lenders prefer that your DTI ratio be less than 43% to be approved for refinancing. However, this figure can vary by lender and may be more flexible if you have higher qualifications in other areas.
For example, if you have a bit more debt but a higher credit score than you need to refinance, your lender may approve you anyway. Consider consulting with a representative from your lending company before you refinance if you aren’t sure whether your current debt will prevent you from refinancing.
4: Sufficient Home Equity
Your home equity is the percentage of your home that you’ve paid back to your mortgage lender and the percentage of the property you own in full. Most homeowners already have a bit of equity in their property when they sign their mortgage loan because they brought a down payment to the closing table.
Whether you’re refinancing to take advantage of a lower rate or to borrow cash from the equity you have in your property, most lenders will not allow you to finance more than 90% of your home’s value. You’ll usually need at least 10% equity in your property to qualify for refinancing.
If you have a conventional mortgage loan that had less than 20% down when you closed, you likely still have private mortgage insurance (PMI) payments on your loan. PMI is a type of coverage that protects your mortgage company if you default on your loan. Homeowners forced to buy PMI at closing can get rid of their payments by refinancing to a conventional mortgage loan once they reach 20% equity in their property.
Considering that PMI can cost you hundreds of dollars a month and provides you with no benefits as the homeowner, it’s almost always a smart idea to refinance as soon as you reach 20% equity. If you aren’t sure how much equity you currently have in your property, contact your lender and request a loan statement.
5: Closing Costs
Like when you close your mortgage loan, you’ll pay closing costs when you refinance. Some closing costs you might see on your refinance disclosure can include:
- Prepaid property taxes
- Loan-origination fees
- Title fees
- Credit-check fees
- Appraisal fee
Some lenders offer no closing-cost refinances that require you to pay $0 at the closing table when you complete your refinance. However, these refinances are not free – instead of paying your closing costs upfront, the lender will add them to the balance of your loan. This means that you’ll pay the closing costs back over time in increased loan payments and that the balance of your closing costs will accrue interest. If you can afford to pay your closing costs upfront when you refinance, you can save money later.
Do I Qualify for a Mortgage Refinance?
While not every lender has the same mortgage refinance qualifications, most banks or credit unions require the following:
- A home loan that’s in good standing with no missed payments in the last 12 months
- An adequate credit score (620 or higher for conventional loans and 580 for government-backed programs)
- A debt-to-income ratio of 43% or lower
Why You Should Trust Us
Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who’s won awards for his New York City economy coverage. He’s navigated tricky real estate markets in New York, Northern Virginia and North Carolina.
For this story, we worked with Reed Letson, a mortgage broker and owner of Elevation Mortgage in Colorado.
Frequently Asked Questions
How much income do I need to qualify for a refinance?
The amount of income you must earn to refinance will vary depending on your outstanding debt. Use the debt-to-income ratio calculation above to determine how much money you must earn to stay at or below a DTI ratio of 43%, which most lenders require that you meet in order to refinance.
Does everyone get approved for refinancing?
No, not everyone gets approved for refinancing. While being approved for mortgage refinancing is usually a more straightforward and simple process when compared to getting a mortgage loan to buy a home, there are still credit, income, debt and closing cost requirements you must meet. For example, if you have a late payment on your mortgage loan, you will not get approved for refinancing.
Can I refinance my mortgage if I have bad credit?
Yes, it is possible to refinance your mortgage even if you have bad credit, but it may be more challenging to find lenders who are willing to work with you and you may face higher interest rates or fees. It is recommended to improve your credit score before attempting to refinance to have more options and better terms.
Sources
- Reed Letson, mortgage broker and owner of Elevation Mortgage in Colorado.
About Anthony O'Reilly
Anthony O’Reilly is an updates editor for Benzinga. He’s won numerous journalism awards for his coverage of the New York City economy and Long Island school district budgets.
