There are a variety of requirements that need to be met depending on the type of refinance option you choose. For cash-out refinance options, your name must be on the title of your home for a minimum of 6 months if you have a jumbo loan or VA loan. You’ll likely need to wait a year for a conventional or FHA cash-out refinance. There are limited exceptions to these rules including if you’re taking advantage of delayed financing or you’ve inherited the home.
There are also a few other refinance requirements you will need to consider before applying to your mortgage lender.
An Adequate Credit Score
Your credit score has a direct impact on your ability to refinance. Your credit score is a number that ranges from 300 to 850 and is used to indicate your creditworthiness.
Lenders look at your score to determine how likely you are to repay your debts. Your current credit score also determines whether you’re eligible for a refinance and the mortgage rate you can get.
Just like with your original mortgage, the higher your credit score, the better your rate. Most lenders require a credit score of 620 to refinance to a conventional loan.
FHA Loan Refinance Credit Score Requirements
FHA loans have a 500 minimum median qualifying credit score. However, most FHA-approved lenders set their own credit limits. Rocket Mortgage® requires a minimum 580 credit score to qualify. The credit score to qualify for a cash-out FHA loan refinance is often slightly higher at 620. The exception is if you already have your loan with us and you're taking cash out to pay off debt at closing. The median credit score can be as low as 580.
You can also refinance through an FHA Streamline refinance, which enables you to refinance an existing FHA loan to a lower interest rate more quickly. You can avoid a lot of extra paperwork and continue with a no-appraisal refinance in many cases. Since you’ve already proven you are a good credit risk for an FHA-guaranteed loan through your original FHA mortgage, the streamline option can save you time and money.
If you're looking to lower your rate or change your term, the minimum median qualifying credit score to get a VA loan is 580. You can also take cash out at this score as long as you leave at least 10% equity in your home after the refinance. If your median score is 620 or higher, you can cash out up to the full amount of your equity.
The Department of Veterans Affairs loan program offers a refinance streamline program called an Interest Rate Reduction Refinance Loan (IRRRL). Rocket Mortgage requires a minimum 580 credit score to proceed with a VA IRRRL. If you want a VA IRRRL with Rocket Mortgage but are switching from a different lender, you'll need a minimum credit score of 600.
If you're worried about qualifying for a refinance with your current credit, there are strategies for refinancing with bad credit.
Substantial Home Equity
In addition to an adequate credit score, you must have built up enough equity in your home to qualify for a refinance. Home equity is the percentage of the home’s value that you own and is the amount you would get if you sold the house and paid off your mortgage. The more equity you have, the better.
20% Equity Or More
A general rule of thumb is that you should have at least 20% equity in your home if you want to refinance. If you want to get rid of private mortgage insurance, you’ll likely need 20% equity in your home. This number is often the amount of equity you’ll need if you want to do a cash-out refinance, too.
It’s important to also note that most mortgage lenders only allow borrowers to use 80% – 90% of their home’s equity for a cash payment. Although, if you are refinancing with a VA loan, your lender may allow a higher loan-to-value ratio (LTV), depending on your credit score and personal situation. At Rocket Mortgage, you can cash out up to 100% of your equity with a minimum 620 FICO® Score.
Under 20% Equity
If your equity is under 20% and if you have a good credit rating, you may still be able to refinance, but you might have to settle for a higher interest rate or mortgage insurance. You may find that it’s worth refinancing even if you don’t have much equity if interest rates have dropped significantly since you closed on your mortgage.
There are no equity requirements for interest-reduction FHA Streamline refinance loans. You do need 20% equity for a cash-out refi in most circ*mstances.
In addition to an adequate credit score, you must have built up enough equity in your home to qualify for a refinance. Home equity is the percentage of the home's value that you own and is the amount you would get if you sold the house and paid off your mortgage. The more equity you have, the better.
In general, lenders expect you to have a minimum of 20% in home equity to refinance. In other words, the loan balance must be 80% or less of the home's value. If you don't have enough equity to meet the lender's requirement—especially if you want to take cash out of the home—you may not be eligible to refinance.
Historically, the rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 2%. However, many lenders say 1% savings is enough of an incentive to refinance. Using a mortgage calculator is a good resource to budget some of the costs.
They'll review your income, assets, debt and credit score to determine whether you meet the requirements to refinance and can pay back the loan. Some documents your lender might need include the following: Two most recent pay stubs. Two most recent W-2s.
In general, lenders will let you draw out no more than 80% of your home's value, but this can vary from lender to lender and may depend on your specific circ*mstances. One big exception to the 80% rule are VA cash-out refinances, which let you take out 100% of your existing equity.
The new monthly mortgage payment shouldn't be more than 30% of your monthly income. To refinance $200K over a 30-year fixed term, you'll need an income of approx.$5,200/month. (This is an estimated example – rates and other factors are subject to change.)
Refinancing can save you money if you get a lower interest rate, but you could also end up paying more if you refinance simply to extend the loan term. Refinancing can help you consolidate debt or tap your home equity for extra cash for renovations, but it can also lead to more debt.
Refinancing to lower your monthly payment is great unless you're spending more money in the long-run. Moving to an adjustable-rate mortgage may not make sense if interest rates are already low by historical standards. It doesn't make sense to refinance if you can't afford the closing costs.
Refinancing allows you to lengthen your loan term if you're having trouble making your payments. The downsides are that you'll be paying off your mortgage longer and you'll pay more in interest over time. However, a longer loan term can make your monthly payments more affordable and free up extra cash.
Moving into a longer-term loan: If you're already at least halfway through the loan term, it's unlikely you'll save money refinancing. You've already reached the point where more of your payment is going to loan principal than interest; refinancing now means you'll restart the clock and pay more toward interest again.
You don't need a down payment to refinance, but you'll likely have to come up with cash for closing costs. Some lenders let you roll closing costs into the mortgage to avoid upfront expenses. You can also try negotiating with the lender to waive them.
In conclusion. Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months ...
What Factors Do Refinance Appraisers Consider? An appraiser considers several factors inside and outside the home to determine its value. Let's review some factors appraisers consider to determine a home's value.
The bottom line. You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow.
You'll need to bring a state-issued photo ID and a cashier's check or wire transfer to pay for outstanding items or closing costs that aren't rolled into the loan. You'll be asked to review and sign several documents, including affidavits and declarations.
If you want to refinance, no down payment is needed. Still, it does not mean that you won't have to pay anything to refinance your mortgage. You will have to pay closing costs that typically add up to about 2 to 5 percent of the loan amount. Get Your Refi Quote See How Easy it is to Get Your Custom Rate!
Refinancing is generally easier than securing a loan as a first-time buyer because you already own the property. If you have owned your property or house for a long time and built up significant equity, refinancing will be even easier.
Introduction: My name is Kimberely Baumbach CPA, I am a gorgeous, bright, charming, encouraging, zealous, lively, good person who loves writing and wants to share my knowledge and understanding with you.
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