Understanding Mortgage Refinance Requirements
You may be able to save on interest, lower your payments or shorten your loan term when you refinance your mortgage, as long as you meet the refinance requirements. Depending on why you’re refinancing and how your finances look, refinance requirements vary.
Knowing the requirements to refinance a mortgage may save you money upfront and, in some cases, help you avoid the hassle of verifying your income or waiting on a home appraisal.
On this page
Mortgage refinance requirements: Quick glance
The requirements for refinancing your mortgage will depend on the type of refinance you choose, the loan program and why you want to refinance. The three most common types of refinances are rate-and-term refinance, cash-out refinance and streamline refinance.
Rate-and-term refinances are the most common type of refinance and allow you to lower your interest rate, change your term and, in most cases, roll in your closing costs.
Cash-out refinances allow you to borrow more than you owe and pocket the difference in cash to use however you wish.
Streamline refinances are an option if you currently have a government-backed mortgage loan, one which allows you to reduce your rate or term with no income or home value verification.
The table below gives you a brief overview of the basic requirements for each.
| Refinance program | Credit score minimum | Max LTV ratio | Max DTI ratio | Income verification required? | Appraisal required? |
|---|---|---|---|---|---|
| Conventional rate-and-term refinance | 620 | 97% | 45% to 50% | Yes | Yes, unless eligible for appraisal waiver |
| Conventional cash-out refinance | 620 | 80% | 45% to 50% | Yes | Yes, unless eligible for appraisal waiver |
| FHA rate-and- term refinance | 580 | 97.75% | 43% | Yes | Yes |
| FHA cash-out refinance | 500 | 80% | 43% | Yes | Yes |
| FHA streamline refinance | N/A mortgage history only | N/A | N/A | No | No |
| VA rate-and-term refinance | No VA-set minimum, but lenders require 620+ | 100% | 41% | Yes | Yes |
| VA cash-out refinance | No VA-set minimum, but lenders require 620+ | 90% | 41% | Yes | Yes |
| VA IRRRL | N/A | N/A | N/A | No | No |
| USDA streamline | N/A | N/A | N/A | No | No |
| USDA non-streamline | N/A | The home’s new appraised value | N/A | Yes | Yes |
Here’s a quick refresher of the different loan types:
Conventional loans. These are nongovernment-backed loans with guidelines set by Fannie Mae and Freddie Mac. When it comes to conventional refinancing, you don’t need any mortgage insurance if you have at least 20% equity.
FHA loans. The Federal Housing Administration (FHA) insures loans for borrowers with credit scores as low as 500, in some cases. Homeowners with a current FHA loan can take advantage of easy refinance qualifications of the FHA streamline program, which don’t require an appraisal or income verification. However, be sure to budget for closing costs, or ask your lender to raise your rate to cover the costs — the program doesn’t allow you to add the costs to your loan amount.
VA loans. Military borrowers with a current loan guaranteed by the U.S. Department of Veterans Affairs (VA) may be eligible for a VA interest rate reduction refinance loan (IRRRL). No income documents or appraisal are required.
USDA loans. Rural homeowners may be able to refinance a loan backed by the U.S. Department of Agriculture (USDA) with the streamlined assist program that doesn’t require income or appraisal documents. However, the USDA doesn’t permit cash-out refinances. There’s also a non-streamlined USDA refinance option that comes in handy if you need to roll in the cost of a payment subsidy you were given to temporarily reduce your monthly payment.
Important details about mortgage refinance requirements
Credit score minimums
Some mortgage companies set their own minimum credit score to refinance, even though they aren’t required by the government agencies. For example, the VA doesn’t require a minimum score, but many VA-approved lenders won’t accept less than 620.
Loan-to-value (LTV) ratio
Your LTV ratio is a measurement, expressed as a percentage, of how much of your home’s value you borrow. VA mortgage guidelines allow borrowers to finance up to 100% of the home’s price, while FHA and conventional lenders require a little bit of equity to qualify for a rate-and-term refinance. FHA streamline, VA IRRRL and USDA streamline loans don’t require an LTV ratio calculation.
Lower LTV ratio maximum for cash-out refinance
If you need extra cash to make home improvements or consolidate debt, you can borrow more than you owe and pocket the difference with a cash-out refinance. You’ll be capped at an 80% LTV for a conventional or FHA cash-out refinance. If you’re eligible for a VA loan, a VA cash-out refinance allows you to borrow up to 90% of your home’s value.
Debt-to-income (DTI) ratio
Lenders divide your total monthly debt, including your new mortgage payment, by your before-tax monthly income to calculate your DTI ratio. However, if you’re eligible for an FHA streamline or VA IRRRL, you can skip this requirement.
Asset requirements
You’ll typically pay between 2% and 6% of your loan amount for refinance closing costs. If you don’t plan to roll them into your loan amount, lenders will verify that you have enough cash assets to cover the out-of-pocket costs. This includes banking account balances, retirement account assets and stock or brokerage accounts.
Income requirements
Gather recent pay stubs, W-2s and federal tax returns to show proof that you meet the income requirements for a mortgage refinance. Digital lenders may be able to electronically access your earnings history from your employer, if you give them permission. You won’t need any income documents if you qualify for government-backed streamline refinance programs.
Appraisal requirements
Your lender may offer an appraisal waiver if its automated underwriting system accepts your estimated home value. You might even get an appraisal waiver on a conventional loan if you leave 30% equity in your home after taking cash out. No appraisal is required on VA IRRRL, FHA or USDA streamline loans.
More flexible conventional appraisal guidelines in 2023.
You may qualify for an appraisal waiver now, even if your home is used as a rental property or second home under Fannie Mae and Freddie Mac’s new appraisal waiver guidelines.
Loan limits
You can only borrow up to the loan limits for the program you’re applying for. VA loans don’t have any limits, while conforming loan limits are higher than FHA loan limits.
Things to know
New homeowners often ask how soon they can refinance after they close their purchase loan. As long as there’s a benefit and you’re not taking cash out, you can refinance a conventional loan any time after closing. Government-backed refinance programs require you to wait seven to 12 months, depending on the refinance purpose.
Changes to mortgage refinance rate requirements in 2023
Fannie Mae and Freddie Mac, two agencies that help fuel the mortgage market and set requirements for conventional lending, announced big changes to fees related to conventional loans. FHA borrowers will also save on their monthly payment, due to a reduction in the annual mortgage insurance premium (MIP).
Conventional benchmark score increased to 780.
The new benchmark for getting the lowest rate for a conventional loan is now 780 — that’s a 40-point increase from the previous 740 standard. The silver lining: If you’re refinancing with a credit score between 640 and 679, you won’t be penalized as much as before the changes kicked in.
Conventional cash-out refinance fee increases.
Be prepared for higher rates if you’re tapping equity on a conventional cash-out refinance. The fees have increased substantially, and are typically passed on to you in the form of a higher rate or additional closing costs.
Lower fees for conventional loans on investment and two- to four-unit properties. If you’re considering a refinance to improve cash flow on a rental home or two- to four-unit property, you may get a better investment property rate since the fees for these types of properties have been reduced.
Lower FHA MIP. The FHA announced a reduction in the annual FHA mortgage insurance premium (MIP) borrowers must pay regardless of their down payment amount. The reduction took effect in March 2023 and is expected to save the average FHA borrower about $800 per year.
Loan limits in 2023. Conventional conforming loan limits change each year based on shifts in average home prices. FHA loan limits also change annually and are based on a percentage of the conforming limits. The 2023 loan limits for a single-family home in most parts of the country are:
- $726,200 for a conventional loan
- $472,030 for an FHA loan
Higher loan limits may apply if you live in a “higher-priced” area or are buying a multifamily home.
Other requirements and features of cash-out refinances
Conventional cash-out refinance
- No mortgage insurance required. You won’t pay any private mortgage insurance (PMI) since your LTV ratio is limited to 80%.
- Tap equity from vacation homes or investment properties. This is the only standard loan program that allows you to convert equity to cash on a vacation home or investment property. However, you won’t be able to bank as much equity as you would on a primary home.
FHA cash-out refinance requirements
- FHA mortgage insurance required regardless of equity. You’re stuck paying both upfront and annual FHA mortgage insurance premiums, no matter how much equity you’ve built up.
- FHA mortgage insurance can’t be canceled. Unlike PMI, you can’t avoid paying for FHA mortgage insurance. You’ll need to refinance to a conventional or VA loan, or pay the premiums for a minimum of 11 years.
VA cash-out refinance requirements
- No mortgage insurance. VA loans don’t require mortgage insurance, but you may pay a VA funding fee unless you’re exempt because of a service-connected disability.
- No loan limits. There are currently no VA loan limits, which means you could borrow more than the conforming loan limit if you live in a pricey neighborhood. Check with your lender though — they may have their own restrictions.
If you’d like a little more guidance as you choose a lender, check out our picks for the best mortgage refinance companies.
Why do you want to refinance?
Before you replace your current mortgage with a new one, figure out your refinance “why.” Changing your mind in the middle of a refi may cost you time and money, defeating the purpose of refinancing in the first place.
Here are some of the most common reasons you should refinance a mortgage:
Lower your monthly payment
Most homeowners refinance to lower their rate and monthly payments. There are no hard-and-fast mortgage rules about how much interest rates need to drop for you to benefit from a refinance. However, you’ll want to stay in your home long enough to recoup your refi closing costs, known as reaching the break-even point.
Get rid of mortgage insurance
If you’re paying monthly mortgage insurance because you made a low down payment or took out an FHA loan, a refinance may help you eliminate or reduce PMI.
For example, if you’ve reached 20% equity in your home, you can refinance to a new conventional loan without paying PMI. FHA mortgage insurance, however, is required for the life of the loan if you made the minimum 3.5% down payment. If you put down 10% or more, you’ll pay FHA mortgage insurance for 11 years.
Pay off your loan faster with a shorter term
If you have some room in your budget for a higher monthly mortgage payment, it may make sense to refinance to a shorter loan term such as a 15-year fixed-rate mortgage. You could save thousands of dollars in long-term interest charges, and 15-year fixed mortgage rates are typically lower than 30-year rates.
Tap equity to make home improvements or pay off high-interest debt
Home equity is the difference between your home’s value and your current loan balance, and you can access it with a cash-out refinance. By borrowing more than you currently owe, you can pocket the difference to consolidate maxed-out credit cards or make upgrades to increase your home’s value even more.
How to shop for and get the best mortgage rate
LendingTree research has consistently shown that borrowers can receive lower mortgage rates by shopping around with multiple lenders — that’s especially true when you’re refinancing your home.
Once you’ve determined your refinance goals and decided on a loan program, follow these three mortgage refinance tips to snag your best refinance rate:
1. CHECK WITH YOUR CURRENT LENDER.
Your existing lender may make a special refinance offer to keep your business.
2. GET QUOTES FROM THREE TO FIVE LENDERS.
Shop around using a comparison-rate site like LendingTree. You can also call lenders up and collect quotes (ideally, on the same day) to see which one is the most competitive.
3. LOCK IN YOUR RATE.
Interest rates change daily. Plan to lock in your interest rate, keep track of the lock expiration date and respond to lender requests for documents or explanations quickly. The sooner you close, the sooner you’ll begin saving on your refinance.