When you applied for a mortgage loan, you needed to meet a series of qualifications in order to get the financing you asked for. Depending on your situation, you might have needed to improve your credit score or save more money for a down payment before you were provided with financing.
Now that you’re looking to refinance, you’ll need to meet a new set of lender criteria to get the approval you need. Read on to learn everything you need to know about how to qualify for refinancing.
How to Qualify for Home Loan Refinancing
While you will need to 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 when compared to getting a mortgage loan in the first place.
Be sure you have all of the following before you apply for refinancing to make sure you’re approved the first time.
1. A Loan with No Missed Payments
First and foremost — you cannot refinance a mortgage loan that’s not current and up to date. This means that you cannot have any payments outstanding and qualify for refinancing. While this requirement can vary slightly between lenders, some will also deny refinancing if you have a missed payment on your record within the last 12 months. If you’re behind on your mortgage loan payments, make sure you create a plan to get back in control before you apply for home loan refinancing.
If you are up to date on your loan and you have a government-backed mortgage type — like a Federal Housing Administration (FHA) loan or a U.S. Department of Agriculture (USDA) loan — you could qualify for a streamlined refinance. With a streamlined refinance, you could be able to close on your new loan faster and without an additional credit check, which helps you enjoy more manageable payments sooner. However, you cannot have any missed payments on your current loan account to qualify.
2. An Adequate Credit Score
When you apply for mortgage refinancing, you’re essentially replacing your current mortgage loan with a new loan that better fits your needs. This means that lenders will look at your credit score and your credit report when you apply for a refinance — just like they did when you got your first home loan.
To qualify for refinancing, you must meet your lender’s requirements. The minimum credit score you’ll need to qualify will vary depending on the type of loan you’re applying for and your lender’s policies. As a general rule, 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.
3. A Manageable Amount of Additional Debt
If you have more debt, there’s a higher possibility that you’ll miss a payment on your mortgage. This means that any additional debt that you have beyond your current mortgage will reduce your chances of being approved for refinancing.
Lenders use a calculation called your debt-to-income (DTI) ratio when they consider your ability to repay any money that they lend to you. To calculate your DTI ratio, first, add up all recurring debt that you make payments on besides your mortgage. Common sources of debt outstanding 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 all of your minimum account payments together 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 note. This means your total recurring debt beyond your mortgage is $850. $850 divided by $5,000 is 0.17, which means that in this example, 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 it 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 that 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. This means you’ll usually need at least 10% equity in your property to qualify for refinancing.
If you have a conventional mortgage loan but you had less than 20% down when you closed, you likely still have private mortgage insurance (PMI) payments being applied to your loan. PMI is a type of coverage that protects your mortgage company in the event that you default on your loan. Homeowners who are 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.
When you consider the fact that PMI can cost you hundreds of dollars a month and provides you with no benefits as the owner of the home, 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
Just like when you closed on 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 up front when you refinance, you can save money later down the line by doing so.
Benefits of Refinancing Home Loans
Why refinance your home loan in the first place? Refinancing can provide you with a number of benefits, including:
Change your loan’s interest rate: If interest rates are lower now than they were when you applied for your mortgage loan, you can refinance to a lower rate that’s in line with today’s annual percentage rates (APRs). This helps you pay less for your loan over time because you end up paying less money to your loan company by the time you own your property.
Can potentially help unlock lower payments: The longer your mortgage term, the less you’ll pay each month to stay up to date on your payments. If you’re having trouble making your monthly payments, a refinance might be the answer. You can refinance to a longer term, which lowers the amount you pay each month. While this will increase the amount you’ll pay by the time you own your home because you’ll pay interest over a longer period of time, a refinance can help you stay in your home if you run into financial hardship and can no longer make your payments.
You can change your mortgage type: When you refinance your loan, you don’t need to take the same type of loan as you previously had — and there are plenty of reasons why you might need to change your loan type. For example, many homeowners use an FHA loan to buy a home when they have less than 20% to put down or their credit score is not high enough to qualify. However, FHA loans come with a funding fee that you must pay as long as you have your loan. To avoid paying this funding fee, you can refinance your FHA loan to a conventional loan once you have 20% equity in your property.
Things to Consider When Refinancing
While refinancing can provide you with a host of benefits, it may not be the right choice for everyone. Be sure to consider the following before you decide to refinance.
You aren’t guaranteed better rates: While refinancing for a lower interest rate is a common choice for homeowners, there is no guarantee that rates will be lower when you apply for a refinance than when they were when you got your loan. If rates are higher now, you’ll need to accept a new interest rate that’s in line with what others are paying at the time of application. This means that if you’re refinancing for another reason (like taking cash out of your home equity) you could end up with a higher interest rate by the time you close.
You may reduce your equity: If you take a cash-out refinance, you borrow money from the equity you currently have in your property and take out a mortgage loan with a higher balance. While this provides you with immediate access to financing when you need it, it also reduces the percentage of equity you have in your property.
It might not be worth the effort: If interest rates are only a bit lower now than when you got your loan, refinancing may not save you enough money to justify the cost. Remember that refinancing also comes with closing costs, which will reduce the overall value you get from your lower rate.
Compare Refinancing Options
Refinancing your mortgage loan can allow you to access a lower monthly APR, pay less per month and over time for your loan or enjoy more manageable monthly payments. However, the mortgage lender you choose to provide your mortgage financing will determine the benefits you receive and the qualifications you’ll need to meet to get the loan you need.
Benzinga offers insights and reviews on the following mortgage loan refinancing providers. Consider beginning your search for the right loan with a few of the links below.
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.
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