Refinancing requirements for a mortgage: What to know

Thinking of refinancing your home mortgage? Here are the lender requirements you'll need to meet to qualify for refinancing. (iStock)

You might consider refinancing your mortgage for a variety of reasons. You may want to lower your interest rate or monthly payment, access equity built up in your home or shorten your mortgage term. 

Whatever your reason for wanting to refinance, you'll need to meet specific requirements to qualify for a refinancing mortgage. Shopping around can help you compare different lenders' requirements and find one that saves you money and meets your lending needs. 

You can learn about refinancing a mortgage and refinance lenders at Credible.

• The basics of refinancing requirements
• How the type of refinance affects requirements
• How much will it cost to refinance?
• How to refinance a mortgage
• 4 refinance lenders to consider
• What if I can’t meet refinancing requirements?

The basics of refinancing requirements

To qualify for refinancing, you'll need to meet lender requirements. Specific requirements vary among lenders, often based on the type of refinance loan you apply for and the lender’s underwriting standards. While each lender may have different requirements, most of them look at some common factors when determining if someone qualifies for refinancing. 

• Minimum credit score — Your credit score is a quick indicator of the level of risk a lender assumes when lending money to you.
• Debt-to-income ratio — Lenders use your debt-to-income ratio, or DTI, to determine how likely you are to pay your refinance loan. To calculate your DTI, add up all your monthly bills and divide that total by your gross monthly income. Your monthly debt payments include things like car payments, installment loans, credit cards and other recurring debt.
• Loan-to-value ratio — Your loan-to-value ratio compares your mortgage amount to the appraised value of your home. Lenders use this information to determine eligibility for refinancing and whether private mortgage insurance, or PMI, is required.
• Status of your current mortgage — Lenders also look at the status of your current mortgage, including whether you make payments on time and other factors.
• Time since your last closing — There's no legal limit to how many times you can refinance a home. But if you purchased your property recently, you may not have enough equity in the home to qualify for a refinance.
• Assets — Lenders look at all your assets when you apply for refinancing. Listing all of them on a mortgage application could help your chances of approval and possibly help you score a lower interest rate.
• Income — Lenders want proof that you have an adequate, consistent source of income to make monthly mortgage payments.

How the type of refinance affects requirements

Multiple types of refinancing mortgages are available. Your objectives will determine which type you choose. And the type of refinance you apply for helps determine the qualifications you’ll have to meet to get the loan.

• Cash-out refinance — This type of refinance allows you to replace your current mortgage with one for more than you owe on your home. You receive the difference between the two loans in cash. Generally, you’ll need a DTI of 50% or less and at least 20% equity in your home to qualify for a cash-out refinance.
• FHA loan refinance — You can also refinance an existing FHA home loan through an FHA streamline refinance. This type of refinance requires you to have a minimum credit score (typically 600 or higher), meet DTI and LTV limits and a good payment history.
• VA loan refinance — Veterans or their family members can also refinance an existing VA home loan to lower the interest rate and get different terms. VA loans don't require down payments or mortgage insurance, but you may be required to pay an upfront VA funding fee and closing costs.
• USDA loan refinance — A streamlined assist refinance allows rural homeowners to refinance their USDA loans to more affordable terms. There’s no credit check or debt-ratio calculation, but you must show that you've made full monthly payments for the past 12 months to qualify.

How much will it cost to refinance?

While refinancing your mortgage loan can save you considerable money, that doesn't mean there isn't a cost to refinance. Average closing costs on a refinance loan are about $5,000, according to Freddie Mac. Your lender, the size of your loan and where you live may determine how much you’ll end up paying. 

Among those costs are several fees that may include: 

• Origination fees
• Application fees
• Appraisal fees
• Inspection fees
• Credit report fees
• Tax service fees
• Attorney fees
• Underwriting fees
• Other fees

Depending on your current lender, you may have to pay a prepayment penalty on your existing mortgage when you refinance. 

Mortgage points are another fee your lender may charge. Each point is worth 1%of the mortgage total, so one point on a $200,000 mortgage would cost $2,000. Lenders often allow you to buy points to lower your mortgage's interest rate. This is known as "buying down the rate."  

Some lenders may offer no-cost refinancing, but that doesn't mean there isn't a cost involved. Instead, your lender rolls the costs into your new mortgage loan instead of having you pay them upfront. You could end up paying more overall due to interest charges on these expenses. 

How to refinance a mortgage

Refinancing a mortgage doesn’t have to be overwhelming. Following the necessary steps can help ensure a smoother process when refinancing your mortgage loan. 

1. Determine why you want to refinance

Your reason for refinancing will determine what type of refinancing loan you pursue. 

Knowing why you want to refinance will help inform your choice of lender and what to look for in a refinance loan.

2. Shop around 

One of the best things you can do when refinancing is to compare rates from as many lenders as possible. This allows you to find the best lender to meet your specific needs. It will also help you weed out lenders with requirements you don't meet or those that don't offer competitive rates. 

Many lenders allow you to check rates before applying without negatively affecting your credit score. You can receive prequalified rates in minutes by answering a few questions about your needs and your current mortgage loan and providing some basic personal information. 

3. Choose a lender and apply

Once you've received multiple rate offers, compare all the information and decide whether to move forward with a lender. If so, visit the lender's website to apply for home refinancing. 

Having the necessary documents and personal and financial information on hand when you apply will help speed up the process. Documents and info you should gather include recent copies of: 

• Pay stubs
• Tax returns
• W-2 forms
• Monthly bank statements
• Monthly statements for retirement and investment accounts
• Mortgage statement
• Billing statements for recurring debt like car loans, student loans and personal loans
• Homeowners insurance policy

You may need to provide more information in some cases, such as if you’re self-employed or belong to a homeowners association. 

4 refinance lenders to consider

Hundreds of private lenders offer home refinancing, including the following Credible partners. Each of these lenders allows you to prequalify for refinancing without a hard credit inquiry.  

Rocket Mortgage

Rocket Mortgage offers a digital-forward approach to refinancing, allowing you to prequalify and apply through its mobile app.  Rocket Mortgage is a part of the Quicken Loans family and is recognized as one of the leaders in customer satisfaction. 

Mortgage types: Conventional, FHA, jumbo, VA

Minimum credit score: 580

Minimum down payment: 3% (conventional)

Loan terms: 15 and 30 years

Stearns Lending

Stearns Lending offers a variety of refinance loans, including non-qualified mortgage (non-QM) options. These types of loans are geared toward self-employed borrowers and other non-traditional income earners. 

Mortgage types: Conventional, FHA, jumbo, non-QM, USDA, VA

Minimum credit score: 580 (FHA, VA); 620 (conventional, USDA)

Minimum down payment: 3% (conventional)

Loan terms: Contact lender

Caliber Home Loans

Caliber Home Loans offers a variety of refinance loans, including some renovation-specific loans. It also offers several loan term options to meet various borrower needs. 

Mortgage types: Conventional (fixed and adjustable), FHA, jumbo, USDA, VA

Minimum credit score: 580

Minimum down payment: 3% (conventional)

Loan terms: 10 to 30 years (fixed-rate); 3/1, 5/1, 7/1, 10/1 and 5/5 (ARMs)

LoanDepot

Loan Depot offers various home refinancing options, but it’s best known for VA loan refinancing. The company even has dedicated VA loan specialists to work with borrowers directly.  

Mortgage types: Conventional (fixed and adjustable), FHA, VA

Minimum credit score: 580 (FHA); 620 (conventional)

Minimum down payment: 5% (conventional)

Loan terms: 10, 15, 20 and 30 years (fixed-rate); 3/1, 5/1, 7/1 and 10/1 (ARMs)

With Credible, you can compare refinancing rates from these lenders without affecting your credit.

What if I can’t meet refinancing requirements?

Not everyone will qualify for mortgage refinancing. Some reasons you may not qualify for refinancing include: 

• A low credit score — You could have your application denied if you fail to meet a lender's minimum credit score requirement. You usually need a minimum credit score of 620 to qualify for conventional home refinancing. Other refinance loans may allow you to qualify with a lower credit score.
• Too much debt — Having too much debt compared to your income is a cause for concern for many lenders. A high DTI ratio signals you could be a lending risk and may keep you from qualifying for home refinancing.
• You're underwater on your mortgage — Being underwater on your mortgage means you owe more on your home than it's worth. This can keep you from qualifying for traditional home refinancing.

If your application for refinancing is denied, determine the cause and then take action to improve your situation or turn to alternative options. If you have poor credit, take time to improve your credit. Making payments on-time and in full each month will help improve your score. It’ll also help you pay off debt, which improves your DTI. 

If you're underwater on your mortgage, look into alternative programs such as Freddie Mac’s Enhanced Relief Refinance Mortgage program (if Freddie Mac owns your mortgage) or a High Loan-to-Value Refinance from Fannie Mae (if you have a Fannie Mae mortgage).  

Comparing multiple lenders before applying for refinancing can help you avoid having your application denied and may save you money in the end.