A Guide to Mortgage Refinance Requirements

Whether you’re looking to lower your monthly payment, save on interest, or get different loan terms, there are many reasons why you might be thinking about refinancing. Mortgage refinancing comes with its own set of requirements, similar to those of a purchase loan. By knowing what’s required to refi your home, you can determine if you’re eligible and approach the process with confidence.

Key Mortgage Refinance Requirements

Refinance requirements vary by lender and type of refi, but there are some common boxes you need to check to get a new home loan. Here’s what to consider:

Credit Score

Lenders will review your credit score to better understand your ability to repay the new home loan. Your credit health impacts not only your loan approval but also your loan terms, including the interest rate. In general, the higher your credit score, the better your chances of approval and the more favorable your interest rate.

While credit score requirements vary by lender and loan type, refinancing often requires a credit score of at least 620. Some loans, such as government-backed cash out and streamline options, may have lower requirements. For example, Freedom Mortgage can often accept a credit score of 550 or higher.

Debt-to-Income Ratio (DTI)

Your debt-to-income ratio (DTI) is a strong indicator of whether you can handle your new mortgage payments based on how much money you’re bringing in. Lenders will look at your total income compared to your total debts, and typically, the lower the DTI, the better your odds of getting approved for a refinance with favorable terms.

While target ratios vary by loan and lender, you’ll likely need a DTI of around 36%—41% for a conventional mortgage refi. FHA or VA loan refinances may allow for higher DTIs, such as 43%.

Loan-to-Value Ratio (LTV)

Since refinancing involves looking at how much of your mortgage you’ve already paid off compared to how much you want to borrow, the loan-to-value ratio (LTV) is a key component of refi eligibility. Lenders will often look for an LTV of at least 80%, which means you’ve accumulated at least 20% in equity, but this could be higher or lower based on what type of loan you’re applying for.

Home Appraisal

Some types of refinances, including rate-and-term and cash out, require an updated home appraisal to confirm your home’s current value. This helps lenders understand how much your home is worth compared to how much you’ve paid off. Many homeowners pursue a cash out refinance when their home value has gone up, such as from market conditions or recent renovations, increasing their amount of tappable equity.

Application and Documentation

You need to submit an application to refinance your home loan. For rate-and-term or cash out refinances, this can look similar to your original mortgage application. For streamline refinances, you can often forgo much of the paperwork and experience an expedited process.

Here are some common types of documentation you may need to provide:

• Pay stubs, tax returns, W-2s, and 1099s
• Proof of homeowners insurance
• Asset statements (savings, checking, retirement)
• Government-issued ID
• Cashier’s check or wire transfer for closing costs

Check with your lender before applying to ensure you have everything needed to avoid delays.

Closing Costs

When considering the cost to refinance, closing costs are the biggest expense to plan for, and they typically amount to around 2%–6% of your loan amount. Refinance closing costs include title insurance, appraisal fees, credit report fees, and loan origination fees. When deciding if something like a cash out refi is worth it, be sure to weigh these costs against your overall goals.