When you refinance your mortgage, you are not just exchanging one home loan for another. There are additional steps involved. As was the case when you purchased your home, you will need to submit an application and demonstrate that you satisfy the lender's requirements and the loan program to be eligible for a refinance. For mortgage refinancing to benefit you financially, certain criteria must be met. The following are some of the fundamental requirements that you can be asked to meet for a refinance.

Credit Score to Refinance

Non-government-backed mortgages like those provided by the Federal Housing Administration or the Department of Veterans Affairs often have looser credit standards than traditional loans.

In contrast, mortgage lenders have been tightening their credit criteria across the board during the last several months. According to the mortgage data company Ellie Mae, ninety percent of the borrowers who refinanced their mortgages in July 2020 had FICO credit ratings of 700 or above. Only a fraction of one percent had credit ratings lower than 600, while 10% had scores between 600 and 699.

Conventional Loan

In most cases, a credit score of at least 620 is required to qualify for a traditional mortgage refinance.

FHA Loan

The minimum credit score required by the FHA for a cash-out refinance 500, while the minimum credit score required for an FHA streamline refinance is 580. However, lenders often want far higher ratings. The Federal Housing Administration (FHA) also offers a program known as the streamline refinance, which does not require the lender to do a credit check on the borrower.

VA Loan

The VA does not mandate a minimum credit score for mortgages obtained through the VA; nevertheless, individual lenders are free to establish their own requirements. Typically, a credit score of 620 or higher is required to qualify for a mortgage refinance via the VA.

Debt-To-Income Ratio

Lenders willing to refinance your mortgage will often examine your current debt level and your ability to repay the loan before agreeing to do so. Your DTI ratio is proportion of monthly pretax income which goes paying down debts such as your mortgage and other loans. The better off you are, the smaller the ratio. Lenders like to see borrowers with a debt-to-income ratio lower than or equal to 36%. If you have a higher DTI, you could still be eligible for a refinance loan, but the interest rate you pay might be higher.

Home Equity to Refinance

Conventional

To qualify for a regular conventional loan refinancing, the value of your home must be more than the amount you already owe. An appraisal is often necessary before a lender would agree to finance a home purchase.

Your equity in the home may be calculated as the home's value less the amount still owed on the mortgage. To refinance a conventional loan and eliminate the need for private mortgage insurance, the equity you have built up in your home must equal at least 20% of the property's worth.

You may access a portion of the equity in your home via a cash-out refinancing by borrowing more money than you now owe on the mortgage, but the amount cannot exceed the property's value. In most cases, the cash you may get from a lender is capped at 80% or 90% of your home's equity. After you have taken out the cash, the loan-to-value ratio for the home must be at or below 90%, which indicates that you must still have at least 10% equity in the property. The exact minimum required score varies from lender to lender.

FHA Loans

The FHA streamline refinance does not usually need an appraisal, whereas the FHA cash-out refinance must. Neither of these refinancing options includes taking cash out of the home. You'll need at least 20% equity in your home to be eligible for a cash-out from the FHA. Following the completion of the purchase, the maximum loan-to-value ratio is typically set at 80%.

VA Loans

A VA refinance loan may not need any equity in your home. When obtaining a VA Interest Rate Reduction Refinance Loan, also known as a VA streamline refinance, the VA does not need borrowers to get an assessment. However, there are financial institutions that do and will put a limit on the loan-to-value ratio.

Refinance Waiting Period

After receiving a mortgage, there are several circumstances in which you will be required to wait a particular amount of time before you may refinance. The guidelines change depending on the kind of mortgage. In most cases, you are permitted to re-refinance a traditional loan unlimited times, provided you do not withdraw cash from the transaction. You will need to have owned the home for at least six months to qualify for a standard cash-out refinance.