Essential requirements for refinancing your mortgage
Quick insights
- Mortgage lenders typically require proof of stable income, manageable debt and sufficient assets to qualify for a refinance.
- Your credit score, debt-to-income ratio and home equity level are important factors that determine eligibility and interest rate.
- An updated home appraisal and full financial documentation are usually needed to verify property value and support approval.
Refinancing has several potential benefits, including taking advantage of lower interest rates, changing your loan terms or tapping into your home equity. There are some common requirements lenders will review when you apply to refinance, regardless of which type you’re applying for.
We'll explore these refinance requirements, how they vary by loan type and what your next steps should be to refinance.
When should you refinance?
Refinancing generally makes sense when the long-term financial benefit outweighs the upfront closing costs. Since refinancing usually comes with fees, timing is of great importance. Common reasons homeowners may choose to refinance include:
- Lowering your interest rate to reduce your monthly payment and total loan cost over time
- Switching from an adjustable-rate mortgage to a fixed-rate mortgage for more predictable monthly payments.
- Eliminating mortgage insurance by changing loan structure or improving equity position.
- Adjusting your loan term (shorter to save on interest, or longer to lower monthly payments)
- Tapping into home equity for goals like high-interest debt consolidation, home renovations or major purchases
A good rule of thumb: refinancing works best when the savings or financial benefit outweigh the break-even point of your closing costs over time.
Basic requirements to refinance a mortgage
There are five critical areas lenders will review when you apply to refinance. The specific thresholds for each area can vary significantly depending on the loan type, the lender and their holistic review of your application.
Credit score
Your credit score will be one of the main factors lenders review for almost any loan you can apply for. Refinancing is no different, regardless if you’re looking to access equity with a cash-out refinance or lower your monthly payment with a rate and term refinance.
Similar to when you applied for the original loan, there are benefits to having a strong credit score beyond just qualifying for the loan. Generally, the stronger your credit score, the more favorable terms lenders can offer. This holds true for refinancing, as well. You’ll need to communicate with your lender directly to determine what score you’ll need to meet their qualifications for a refinance.
Debt-to-income ratio
DTI ratio accomplishes multiple priorities for the lender at once. First, it gives them a clear picture of your current income relative to your existing debt obligations. This helps lenders understand how much of your monthly income is already going toward debt payments.
Be mindful that refinancing can lead to taking on more debt. This will affect your DTI ratio moving forward, which you need to factor into your financial planning, especially if you’re considering additional financing.
Loan-to-value ratio
The loan-to-value ratio (LTV) allows lenders to assess how much equity you’ve built in the property. Equity can be one of the key factors mortgage lenders take into account when reviewing your application. Generally, the more equity you have, the less risky a new loan is for them, improving your chances of being approved.
LTV is calculated by dividing the outstanding loan amount by the property’s appraised value or purchase price. (Multiply the results by 100 to convert it into a percentage.) The lower the number, the better the ratio.
LTV and equity are two sides of the same coin, meaning they have an inverse relationship. Together, they always add up to 100% of your property’s value. As your home equity goes up, your LTV ratio goes down. For example, if you have 20% equity in your home, your LTV is 80%.
Do you have to have 20% equity to refinance?
Conventional wisdom says you need an LTV of 80% or lower (20% equity) to refinance, but that’s not necessarily true. It’s a fine guideline, but the exact threshold you need will depend on the loan, the lender and your application.
One reason 20% equity is mentioned for refinancing conventional loans is that it’s the threshold at which private mortgage insurance (PMI) can be dropped from the loan, increasing monthly savings.
Appraisal
Lenders use professional home appraisals to determine the fair market value of your home. Think of it as a baseline from which you can work. It’s one of the critical variables in the formula to calculate your LTV, so lenders require them for almost all refinances.
According to Yahoo Finance, the average cost of a home appraisal is about $357 nationwide.
Closing costs
Since refinancing means getting a new loan, you’ll usually owe closing costs again. Some lenders might be willing to pay some if they’re running a promotion or allow you to roll them into the loan. Unfortunately, some of the fees you’ll pay again are the same as for the original mortgage, like a title search and an origination fee.
Refinancing your mortgage typically costs between 2% and 6% of the loan amount. Keep in mind that refinance closing costs vary by lender, loan type, location and loan amount, and may include items such as appraisal, title and lender fees.
Cash-out refinance requirements
It’s worth noting that cash-out refinance requirements are usually stricter than rate and term refinances. Rate-and-term refinances aim to take advantage of lower interest rates to either lower your monthly payment or adjust the length of your loan.
Cash-out refinances involve dipping into your equity. That usually means your lender issues you cash, increasing your monthly payment. This results in more risk for your lender, which they offset by thoroughly vetting applicants and setting stringent standards for approval. That said, the final decision on specifics will still come down to your overall application.
What documentation do you need to refinance?
The mortgage documents you’ll need to refinance are the same documents you’ll need for any loan application. They’ll typically include:
- W-2s
- Bank statements
- Tax returns
- Pay stubs
- Official identification
- Profit and loss statement (self-employed)
Keep in mind the required documents can vary depending on your sources of income. If your lender asks for additional supporting documentation, do your best to provide them if possible. Otherwise, you risk delaying the underwriting process.
How soon can you refinance?
The short answer to how soon you can refinance is that it depends. If you want to use the same lender, there’s usually a “cooldown” or “seasoning” period after closing on a loan before you can refinance it. These vary widely by lender but are generally at least six months.
You don’t have to use the same lender that issued the original mortgage when refinancing. However, you may still be limited by the type of loan. For example, if you’re pursuing a Federal Housing Administration (FHA) Streamline Refinance, you must wait at least 210 daysOpens overlay from the closing date.
Refinancing next steps
If you’re interested in pursuing refinancing, get in touch with a home lending advisor today. They can discuss your options and help you find a refinancing loan that suits your situation.
Once you’ve decided on the type of refinancing to apply for, take the time to compare lenders. There’s nothing wrong with reaching out to multiple lenders, and keep in mind you don’t have to use the same lender as your original mortgage. Shopping around could help you find a lower interest rate and save on lender fees.
In summary
Refinancing requirements cover some of the same conditions as your original mortgage application. Keep in mind that refinancing may also require repeating certain steps, like the appraisal and title search, which can increase your closing costs. Also, make sure you’re getting the benefits of refinancing before committing.
