Most homeowners are taking advantage of the current economy by refinancing their mortgages. When they learn of a lower interest rate, a possible lower monthly payment, and the option to dip into their new found equity, they think, ‘why not!’
However, mortgage refinance requirements vary based on how your finances look and why you’re refinancing. Plus, there are some upfront fees to be aware of, such as home appraisals and closing costs.
Before jumping on the refinancing bandwagon, take a look at these mortgage refinance requirements.
Understanding Mortgage Refinances
Paying a mortgage means you’re one step closer to reaching big financial goals. A mortgage refinance could be the step you need to reach those goals sooner.
When you refinance, you replace your current mortgage for a new one. Ideally, this would be at a lower interest rate and/or a shorter term. When done right, refinancing allows homeowners to save hundreds (sometimes thousands) on their mortgage.
Homeowners typically choose to refinance their mortgage to obtain a lower interest rate, to get a lower monthly payment, or to get extra cash for home upgrades. There are several reasons to refinance, but these three are the most common. When you refinance, your new loan will have a different interest rate and terms, and possibly a different lender than you originally worked with.
What are the Requirements to Refinance Your Mortgage
The process of refinancing a mortgage is often easier than buying a home. But this doesn’t make the process any less overwhelming. If you want the process to go as smoothly as possible, you must meet certain mortgage refinance requirements.
You Have Owned the House Long Enough
The amount of time that you’ve owned your home affects your ability to refinance. The length of ownership varies depending on the type of loan and lender. A good rule of thumb is to wait at least six months, but it can be longer depending on your lender.
Credit Score Requirements
When it comes to a mortgage, refinancing or not, your credit score will always play a large role. While certain programs allow for lower credit scores, such as 580, to qualify for refinancing, you often need a score of 620 or higher. To lessen the risk, many lenders will ask for a higher credit score to qualify for refinancing.
Keep in mind that if you want a cash out refinance, then you must have a credit score of 620 or above. If you want to improve your credit score to refinance, pay your bills on time, keep your credit utilization low, and consider qualifying for a secured credit card.
Just like with your original mortgage, lenders look at your ability to pay off your home loan before refinancing.
Not all refinancing options will lower your payments. For example, if you’re refinancing from a 30-year mortgage to 15 years, your monthly payment will increase. Lenders want to know that you can afford this larger monthly payment. Therefore, they look at your debt-to-income ratio (DTI) – which includes things like credit card debts, car loans, student loans, mortgage(s), and home equity loans.
If you want a cash out refinance, your home must be worth more than the amount you currently owe. To know this information, you’re required to have a home appraisal to estimate the true home value.
Proof of Income
Your lender must look at your finances to determine the interest rate to charge on your refinance. Proof of income is required when you apply for a refinance, such as:
- Tax return
- Employment history
- Income history
- Pay stubs (past 2 – 3 months)
Homeowners & Title Insurance
Title insurance protects a property throughout different stages, such as a new construction, resale, or refinancing. When a property changes hands, a new policy is purchased to protect the “new” investment.
When it comes to homeowner’s insurance, different lenders require various coverage. Some lenders will allow the same insurance, but you have to make the change with your insurance company.
Request a Free, No-Obligation Refinance Quote
There are several reasons homeowners decide to refinance. However, one of the smartest reasons is to lower the interest rate and pay a lower monthly mortgage. The rule of thumb is to reduce your rate by 2% or more. However, depending on your situation, even 1% could show a significant savings.
While interest rates fluctuate daily, they generally go down during recessionary times. This is because the Federal Reserve will often cut rates during recessionary times to stimulate growth.
When you’re ready to refinance, check our refinancing calculator and receive a refinance quote. Through our exclusive partnership with Guaranteed Rate, Loan Compass visitors can have lender fees waived along with receiving preferred rates.