Are you eligible for refinancing?
Refinancing can lower your mortgage rate and monthly payments and potentially save thousands over the life of the loan.
You can also shorten the life of your loan, cash out home equity, or switch from a floating rate mortgage to a fixed rate loan.
However, regardless of your goals, you need to meet the basic refinancing requirements. These include minimum credit values, stable income and employment, adequate home equity, and manageable debt.
In some cases, the refi requirements are even simpler than when buying a home. So it's worth checking your eligibility if you think you might be saving money.
Check your refinancing eligibility today (May 12, 2021).
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6 Basic Funding Requirements
The first thing you need to know is that refinancing requirements vary depending on the lender and loan program.
For example, the requirements for traditional withdrawal refinancing are stricter than for FHA Streamline refinancing.
And one lender might be lenient about credit scores and loan-to-value ratios (LTVs) while another might be more stringent.
If you don't meet all of the criteria listed here, you should check with a lender about what options are available to you.
The basic requirements for refinancing a mortgage include:
Your current mortgage must have a good reputation. – If you've skipped payments, you'll need to catch up before refinancingYour current loan may need to be "spiced up" – Some lenders and loan programs have a minimum refinance waiting time after you buy your home or after a previous refinance. It's rarely longYour home equity must be sufficient – Typically, the market value of your home must exceed your mortgage balance by 3% to 20%.You need a decent credit score – The minimum loan value for refinancing is usually between 580 and 680, depending on your lender and loan programYour debt-to-income ratio (DTI) can't be too high – If you have a lot of credit card and other credit borrowings, your refinance may not be approved. Unless you consolidate your debt with a payout refinanceYou need enough money to close – There are ways to prepay your refinancing completion costs. But you have to pay them one way or another
Chances are, all six are required for a general refinancing, especially a payoff loan.
However, some forms of "streamline" funding – particularly those supported by the FHA and VA – only require the first two. The refinancing requirements for these loans usually do not include credit or DTI checks or home reviews.
So use the checklist above as a general guide. But understand that not all criteria apply in all circumstances.
Your own eligibility for refinancing will depend on the type of loan you have and your personal finances.
Check your refinancing eligibility (May 12, 2021)
1. Refinancing Requirements for "Mortgage In Good Condition"
This requirement is almost universal. If you still owe late payments on your original mortgage, you are very unlikely to be approved for a refinance.
The rules vary depending on the mortgage program and lender. But almost everyone has a requirement that their existing mortgage be up to date. And some may block applications from homeowners who have recently received late payments (usually within 12 months).
Streamline your refinancing
The Streamline refinance program is available to homeowners with existing government-supported home loans – including FHA, VA, and USDA loans.
Streamline refinancing is relatively quick, easy and inexpensive compared to mainstream refinancing. And they usually have simpler requirements – for example, the lender may not verify your credit or current employment.
However, you must be up to date with your mortgage payments to qualify for a Streamline Refi.
Two of the government agencies that support these mortgages say the following:
"The mortgage to be refinanced must be current (not criminal)." – Federal Housing Administration Lenders must "verify that the mortgage was paid as agreed" 12 months prior to the refinancing application. – U.S. Department of Agriculture
VA Streamline (IRRRL) exception?
The VA does not have an explicit requirement for a good status mortgage in its refinancing tightening rules (refinancing loan to cut interest rates or IRRRL). But even with one of these, you'll be lucky enough to find a lender willing to ignore a criminal mortgage statement.
For example, Veterans United says that "currently, homeowners are not required to have 30-day late payments on the loan being refinanced in the past 12 months".
2. "Spice" – The time between your last deal and your refinance
Some mortgage programs allow you to wait between your last close and your new loan. In technical jargon, this is known as a "spice".
If your lender has a spice requirement, it will determine how long you will have to wait for refinancing after buying the home or following a prior refi.
For example, you will likely have to wait around 180 days (six months) if you want a withdrawal refinance or a streamline refinance.
However, many refinancing loans do not have such a requirement.
That means that with a compliant loan and some other programs, you may be able to start the refi process right after you close your existing loan.
If you want a traditional loan that doesn't meet Fannie and Freddie's standards, your lender can set your own seasoning period. However, if this is a problem, just poke around until you find a cheaper lender.
Check your eligibility to refinance with top lenders (May 12, 2021).
3. Home Refinancing Requirements
Your home equity is the amount by which the value of your home exceeds your mortgage balance. When refinancing, you will need the minimum capital required by your mortgage program or lender.
These minimums are typically the minimum down payment required to buy a home: a minimum of 3% for compliant loans, 3.5% for FHA loans, and nothing for VA and USDA.
Another way to look at the minimum equity is the maximum loan-to-value ratio (LTV).
For example, if your lender has a maximum LTV allowance of 97%, you will need at least 3% equity to refinance.
Homeowners with 20% or more equity can often cancel or refinance Private Mortgage Insurance (PMI) to remove FHA mortgage insurance.
Streamline your refinancing
The capital requirements are different if you want a streamline refinance or a withdrawal.
Optimized refinancing is great. They often do not require evaluation. So nobody knows how much equity you have.
That said, you could potentially get refinance if you run out of equity or if your home is underwater – meaning you owe more on your mortgage loan than the home is worth.
Withdrawal refinancing is a little more difficult from a home equity perspective.
Although you can occasionally find a more personable lender, the general rule is that you must keep at least 20% of your equity after the payout.
Think differently, and your loan-to-value ratio (LTV) needs to be 80% or less.
For example, suppose your home is worth $ 200,000 and your mortgage balance is $ 150,000. The largest amount of refinancing you could get would be $ 160,000 ($ 200,000 x 80% LTV = $ 160,000).
In that case, you could only withdraw $ 10,000. This is because your new loan amount of $ 160,000 is $ 10,000 more than your existing mortgage balance of $ 150,000.
Fortunately, in recent years, many homeowners have found that their equity has grown rapidly in line with higher home prices. This makes refinancing withdrawals more accessible even to homeowners who have made a small down payment when purchasing the home.
Refinancing with high LTV
We mentioned earlier that the LTV is less important for Streamline Refinance Loans. However, these are only available to homeowners with FHA, VA, or USDA mortgages.
What about homeowners who have little or no equity on a compliant mortgage?
You may still be able to refinance with a high LTV program from Fannie Mae or Freddie Mac.
Fannie's High LTV Refinance Option (HIRO) and Freddie's Enhanced Relief Refinance (FMERR) are designed to help homeowners with equity refinance less than 3% get a lower interest rate and lower payment. You must be aware of your mortgage payments to qualify.
4. Minimum creditworthiness requirements
You get a brand new mortgage when you refinance. And lenders will look at your credit score and credit history as closely as they did on your last application.
As with a home loan, you will find it easier to qualify for a refinance with a good credit score and a clean credit report. A good score (around 720 or higher) could even get you a lower interest rate.
Again, there is an exception for most streamline refinancing. Often these do not require a credit check.
If you have seen your creditworthiness decrease since starting out as a homeowner, it is a good idea to increase it before applying for a refinance. Check out our guide to improving your credit score for quick hits. Sometimes even a small improvement can make a big difference in the rate you pay.
5. Debt-Income Ratio (DTI)
Your debt-to-income ratio (DTI) is the percentage of your gross monthly income that you pay each month for debt and other obligations.
Your DTI must be below a certain refinancing threshold – usually 43% or less, although the rules vary depending on the mortgage program.
The monthly expenses that are counted in your DTI usually include:
Housing expenses (after refinancing) including your mortgage payment, property taxes, homeowners insurance, and any homeowners association fees, Minimum credit card payments, Car loan, student loan, and all other credit installations, such as alimony and child support
Unfortunately, the higher your DTI, the higher the mortgage rate you are likely to pay. And lenders and programs set maximum values. Your refinancing application could therefore be rejected if your application is too high.
A DTI of 36% is usually considered good. However, with some programs, lenders approve you with a DTI of up to 45% or even 50%.
Again, this does not apply to most streamline refinances, including the FHA and VA refinances, as well as Fannie Mae's high LTV refinancing option. Many of these don't need to calculate your DTI.
Check your refinancing eligibility (May 12, 2021)
6. Cash to close
You can assume that the refinancing fees will be the same as what you paid for your existing mortgage. The closing refi costs are often between 2% and 5% of your loan amount.
Streamline refinancing is an exception here as well. As a rule, they are much more cost-effective, as certain costs, such as valuation, are usually eliminated.
Refinancing without closing costs
In the case of refinancing in particular, you may be offered options to avoid closing costs. And there's nothing wrong with that. However, you need to understand that you may end up paying more in the long run than if you had paid your closing costs up front.
There are two main variants of refinancing without acquisition costs:
Roll the closing costs into your loan balance – You pay them off with interest as long as you keep the new loan (up to three decades).Accept a "Lender Loan". – This means that your lender will bear the costs and charge you a slightly higher interest rate in return. This higher interest rate will likely cost you much more than the original fees if you keep the loan for the full term
Now, if you are out of money, you may see this as an affordable way to get the refinancing you need quickly. And that's fine. As long as you are aware of the costs versus the benefits.
Review your refinancing options with no closing costs (May 12, 2021).
Remember, the requirements vary depending on the lender
When applying for refinancing, it is important to understand the differences between lenders and loan programs. This knowledge can make or break your application.
A loan program is the type of mortgage that you are applying for. The agencies that regulate mortgage programs – such as Fannie Mae, Freddie Mac, FHA, VA, and USDA – must set minimum requirements for refinance applicants.
For example, Fannie and Freddie require a FICO score of at least 620 to refinance a compliant loan, while the Federal Housing Administration only requires a 580 score for an FHA refinance.
Mortgage lenders must follow the minimum guidelines set by these agencies.
Lenders are also free to set their own higher standards for both the borrower and the property. And many do.
For example, the Department of Veterans Affairs does not have a minimum score for refinancing a VA loan. However, many VA approved lenders aim for a score of 620 or higher.
Just because a particular program allows for a low credit score or high DTI doesn't mean that an individual lender will necessarily approve you.
The good news is that you don't have to refinance with your current lender. You can apply to as many mortgage lenders as you want and find one whose standards and mortgage rates meet your needs.
Shopping could mean the difference between whether or not you qualify for a refinance. And it could save you thousands in the long run.
Check your refinancing rates
All of the rules listed above may sound intimidating. But many homeowners manage the refinancing process successfully. And many are entitled to refi, but do not know it yet.
Refinancing could be worthwhile, even if you have already refinanced in the past few years.
Freddie Mac reports that of all homeowners who refinanced in 2020, 10 percent did so more than once in a 12 month period.
How scary can a refinance be when so many homeowners refinance themselves at least twice in a year? Not much.
The key is to know your loan options, shop around, and find the best price to maximize your savings.
Check your new plan (May 12, 2021)