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Refinancing requirements for mortgages

What you need to do to refinance your home

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Refinancing your home requires getting a new mortgage. You pay off your current loan and replace it with a new loan that has better rates or terms. This is true even when you are refinancing your home with your current lender. Your lender cannot modify the interest rate or terms of your existing mortgage. You will need to a get a new loan when you refinance with them. Here are other important refinancing requirements you’ll want to know!

Application requirements to refinance

Because you need to get a new mortgage when you refinance your home, you will need to apply for a new mortgage. If you are refinancing a conventional loan, you will be required to complete a new application and provide financial documents.

The application to refinance a VA and FHA loan can be easier when you use the streamline program. (VA streamline refinances are also called VA IRRRLs.) If you are a current Freedom Mortgage customer and qualify for a lower rate with the streamline program, we can often start your application for VA or FHA refinancing right over the phone or online! By refinancing, the total finance charges may be higher over the life of the loan.

Document requirements to refinance

Refinancing a conventional loan is often called a “full document” refinance because you typically have to give your lender a new set of tax, income, and financial documents. These documents can include W2s, bank statements, and tax returns. Streamline refinancing for VA and FHA loans often requires far fewer documents.

Credit score requirements to refinance

The minimum credit score you need to refinance your home depends on the loan. Refinancing with a conventional loan often requires a higher credit compared to VA and FHA loan refinances. Different lenders have different credit score requirements. At Freedom Mortgage, you can qualify for VA and FHA refinancing with an easy credit score requirement.

Keep in mind these are minimum credit scores. A higher credit score can improve your chances of getting your refinance approved. A higher credit score might help you get a lower interest rate too. Check your credit score before you refinance your home and look for ways to improve it before you apply.

Home equity requirements to refinance

Depending on your loan and lender, you may be required to have a certain amount of home equity to qualify for refinancing. Lenders often measure your equity with a loan-to-value ratio (LTV). For example, say your house is worth $250,000 and you want to refinance the remaining balance of $200,000. In this case you have $50,000 in home equity and your loan-to-value ratio is 80% ($200,000 ÷ $250,000 = 0.80).

Lenders may have a maximum loan-to-value ratio requirement of 80%. This means your LTV cannot be higher than 80% if you want to qualify for refinancing. Loan-to-value ratio requirements can vary by loan and lender. Also remember having a lower LTV can improve your chances of getting your refinancing approved.

Home appraisal requirements to refinance

To calculate your loan-to-value ratio, lenders need to know the current fair market value of your home. Many times when you are refinancing your home with a conventional loan, the lender will require you to get a new home appraisal to estimate its value. You often don’t need a new home appraisal to refinance a VA or FHA loan with the streamline program.

Debt-to-income ratio requirements to refinance

Many lenders have income requirements for refinancing which they measure using a debt-to-income ratio (DTI). To calculate your debt-to-income ratio, divide your total monthly debt payments – including your mortgage payment – by your monthly gross income.

For example, pretend you are paying $2,000 a month for your mortgage plus a car loan and your monthly income is $5,000. In this case your mortgage debt-to-income ratio is 40% ($2,000 ÷ $5,000 = 0.40). Lenders may require you to have a DTI no higher than 41% to approve your home refinance. When your debt-to-income ratio is higher than the lender’s maximum, you may need to pay down other debts or increase your income before you qualify for a new mortgage.

Home equity loans and lien requirements

It can be more difficult to refinance when you have a home equity line of credit (HELOC) or a home equity loan (sometimes called a "second mortgage"). Lenders may not offer you refinancing when you have a HELOC or home equity loan or you may need to pay off these loans first to get your refinance approved. The same is true when you have a lien against your house, which can happen if you fall behind paying your property taxes. In these cases, you’ll probably be required to pay off the lien before you can refinance your home.

Closing cost requirements to refinance

Almost every home refinance will require you pay closing costs at settlement or add these costs to your mortgage amount. Some lenders may offer you "no closing cost refinances" in return for paying a higher interest rate. Read our article on how much it costs to refinance to learn more about closing costs you might pay.

Loan disclosures and closing your loan

Finally you will need to review and sign the loan disclosures your lender sends you to get your home refinancing approved. You’ll also need to attend the loan closing and sign new mortgage documents. At Freedom Mortgage, you can often review your loan disclosures and documents online using our secure platform. Many times we can help you choose a convenient place to close your new mortgage, including at your home!

Talk to us about home refinancing requirements

Freedom Mortgage offers refinancing on conventional, VA, FHA, and USDA loans. To speak with one of our loan advisors about refinancing, please call 877-220-5533 or Get Started online.

Last reviewed and updated February 2022 by Freedom Mortgage Corporation.

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