Requirements to refinance your mortgage
Refinancing your mortgage isn’t just about swapping one home loan for another. You must apply and meet the refinancing requirements set by the lender and the loan program, just like you did when purchasing your home. In addition, mortgage refinancing must meet certain standards to benefit you financially.
Here are some of the basic refinancing requirements you may encounter.
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Credit score to refinance
Generally, mortgages guaranteed by the Federal Housing Administration or the Department of Veterans Affairs have more flexible credit requirements than conventional home loans, which are not guaranteed by the federal government.
But lenders have tightened credit standards for all mortgages These last months. Of those borrowers who refinanced in July 2020, 90% had FICO credit scores of 700 and above, according to mortgage data provider Ellie Mae. Ten percent had credit scores of 600 to 699, and less than 1% had scores below 600.
The minimum credit score for a conventional mortgage refinance is generally at least 620.
The minimum FHA credit score is 500 for refinancing with withdrawal and 580 for qualifying credit. FHA streamline refinancing. But lenders often demand higher scores. The FHA also offers a non-credit simplified refinance option, which does not require the lender to perform a credit check.
The VA does not require a minimum credit score for VA mortgages, but lenders set their own criteria. A minimum credit score for a VA mortgage refinance is generally at least 620.
Refinance lenders will usually check that you have enough income to pay off the mortgage and review your debt load. Your debt to income ratio, or DTI, is the portion of your monthly pre-tax income that goes to pay off debt, including your mortgage. The lower the ratio, the better. Lenders like to see a debt to income ratio of 36% or less. You can qualify for a refinance loan with a higher DTI, but you can pay a higher interest rate.
Home equity to refinance
Your home must be worth more than the amount you owe for standard conventional loan refinancing. A lender will generally require an appraisal to estimate the value of the home.
Home equity is the difference between your mortgage balance and the value of the home. If you are refinancing a conventional loan at get rid of private mortgage insurance, the equity in your home must be at least 20% of the value of the home.
Cash-out refinancing allows you to leverage some of the equity in your home by borrowing more than you owe, but less than the home’s value. Typically, lenders limit the withdrawal amount to 80% or 90% of the equity in your home. Once the money is withdrawn, the loan to value ratio will need to be 90% or less, which means you still have at least 10% of the equity in the home. The precise threshold depends on the lender.
Do you owe more than what your house is worth? You may be eligible for one of two programs: the Freddie Mac Enhanced Relief Refinance or the Fannie Mae High Loan-to-Value Refinance program. Both are for homeowners who owe more than 97% of their home’s value.
FHA simplified refinancing does not always require an appraisal, but the Refinancing of FHA collections Is. You will need at least 20% equity to be eligible for an FHA withdrawal. The maximum loan-to-value ratio after the transaction is usually 80%.
You may not need the equity in your home for a VA refinance loan.
A VA assessment is required for a VA withdrawal refinance. You may be able to borrow up to 100% of the appraised value of your home, although this varies by lender.
In some cases, you will have to wait a certain period of time after obtaining a mortgage to refinance. The rules vary depending on the type of mortgage.
Typically, you can refinance a conventional loan as often as you like if you don’t take any money out of the transaction. To do conventional refinancing, you must have owned the home for at least six months, unless you inherited the property or obtained it through separation, divorce, or death. a dissolution of the domestic partner. The waiting period required to refinance an FHA, VA, or USDA mortgage ranges from six to 12 months.
Net tangible benefit
“Churning” is an aggressive selling practice in which lenders encourage borrowers to refinance frequently when it is not in the best interests of consumers.
To prevent such predatory lending, federal agencies and many states require borrowers to receive a financial benefit from refinancing, known as a “net tangible benefit.” For example, a net tangible benefit may include a reduction in the interest rate or a move from a variable rate loan to a fixed rate loan.
Federal agencies have net tangible benefit standards for government guaranteed loans, such as FHA and VA loans. And many states have laws that apply to mortgages that are not federally guaranteed.
When you refinance, the lender will need to ensure that the new loan meets the applicable rules to provide a net tangible benefit.