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Whether you want a lower interest rate, smaller monthly payments, or access to your home equity, a succesful refinance requires getting approved for the new loan.
Refinance lenders focus on your credit score, how much equity you have in your home, and your current monthly debt compared to your income.
Meeting these benchmarks determines whether you will qualify. If you qualify, these metrics also help lenders set your interest rate.
Loan programs and refinance goals also affect eligibility. Let's take a closer look.
....in as little as 3 minutes – no credit impact
Why you should consider a refinance
Refinancing your mortgage exchanges your current loan for a new one. The new loan pays off the old loan, and you start making payments on the new loan.
The new loan should improve your mortgage in some way.
"Improvement" often means saving money, either month to month or over the life of the loan, but refinancing can also solve other problems.
Let's look at the major benefits that might make refinancing worth your while.
Lower your interest rate
Even a small rate reduction could create big savings as time passes. Over the course of 30 years, a $300,000 mortgage balance, financed at 6%, costs about $71,000 less than the same loan amount at 7%.
Each homeowner's actual savings will depend on how much interest they've already paid plus upfront costs for the new loan. How long a borrower stays in a new loan also affects total savings.
Adjust your loan term
Shortening the loan term (switching from a 30-year to a 15-year mortgage, for example) can also reduce the total interest you'll pay, though your monthly payments might increase because of the shorter term.
On the other hand, extending your term lowers monthly payments, creating more breathing room in your budget, though this can also create more interest long-term.
Tap into home equity
A cash-out refinance borrows against your home's equity, generating cash for:
- Home improvements or renovations
- Debt consolidation at lower interest ratesÂ
- Education expenses
- Major life expenses
A cash-out refi typically offers better rates than personal loans or credit cards, making it a smart way to fund large expenses.
You can also borrow against your home's equity without refinancing, using a HELOC.
Switch loan types
Some homeowners who have adjustable rate mortgages (ARMs) plan to refinance into a new loan with a fixed rate.
ARMs often start with lower rates, but the rate will eventually change. A fixed-rate mortgage offers level principal and interest payments throughout the loan term.
Change loan programs
Some borrowers who use FHA loans to buy their home like to refinance into conventional loans later so they can stop paying the FHA's ongoing mortgage insurance premiums (MIP). Conventional loans require private mortgage insurance (PMI) only when the loan balance is 80% or more of the home's value.
What to do before refinancing: credit, timing, and cost
Borrowers who already have a good idea about how mortgage approval works can save time and money by qualifying for a loan more easily.
Before applying, borrowers should:
Improve credit score
One of the easiest ways to improve a credit score over a short period of time is to lower your credit utilization. A modest improvement from fair credit (580-669) to good credit (670-739) could qualify you for much better interest rates.
To boost your score quickly, keep credit card balances below 30% of your limits. With a $1,000 limit, for example, stay under $300 to help your credit rating. Of course, making on-time payments on all loans helps a lot, too.
Different loans have different credit requirements:
- Conventional refinances: Usually 620 minimum
- FHA loans: May accept scores as low as 580
Check your credit score requirements for refinancing to avoid surprises when you apply.
Timing and costs
Most refinances take 30-45 days to complete according to the refinance process timeline. Planning ahead can help shorten this timeline.
Gather documents like pay stubs, bank statements, and W2 forms before starting the application.
Borrowers should always be aware of closing costs, which typically run 2-5% of your loan amount. Some lenders like Better offer no-closing-cost refinance options, which allow you to refinance your home with no out-of-pocket costs.
Shopping for the best deal
Each lender has different refinance requirements and rates, so comparing multiple offers often leads to better terms. These five tips to prepare for a refinance can help.
Our refinance calculator can also help you determine potential savings based on current refinance rates. If you have a second mortgage or HELOC, understanding your loan subordination options becomes important when refinancing.
The right refinance aligns with your specific financial situation and goals. By looking at your options and ensuring you meet the criteria, you can make a smart decision that improves your financial position for years to come.
With Better, you can see what you're pre-approved for in as little as 3 minutes, with no impact to your credit score.
More about refinance qualifications?
Whether you can refinance depends a lot on your credit score, loan-to-value ratio (LTV) and debt-to-income ratio (DTI).
Credit score
Your credit score tells lenders how likely you'll make consistent payments on the new loan.
For most conventional refinances, you'll need a minimum score of 620, while FHA loans may accept scores as low as 580. Cash-out refinances typically require higher scores, often 640-680, because they create a greater risk for lenders.
If your score falls short, consider improving it before applying.Â
Most lenders also check your payment history. Late mortgage payments in the past 6-12 months will likely disqualify you, especially for cash-out refinances.
Loan-to-value (LTV) ratio
Your LTV ratio shows what percentage of your home's value you're financing. Calculate it by dividing your loan amount by your home's appraised value.
For example: $200,000 (loan amount) Ă· $300,000 (home value) = 67% LTV
This means you have 33% equity in your home. Most conventional refinances require at least 20% equity (80% LTV or lower). FHA loans might allow up to 97.75% LTV, but you'll pay mortgage insurance. For cash-out refinances, stricter limits apply, typically 80% for conventional loans, while VA loans might go up to 90-100% LTV.
With less than 20% equity, you may still qualify but expect higher rates or continued mortgage insurance.
Some government programs like FHA Streamline Refinance or VA IRRRL might waive the appraisal requirement altogether.
Debt-to-income ratio
Your debt-to-income (DTI) ratio shows how much you can afford to pay each month on a new loan. It does this by measuring your monthly debt payments against your gross monthly income.
Most conventional loans require DTI below 43%, though some lenders may go up to 50% with compensating factors like excellent credit. Cash-out refinances often need lower DTIs, sometimes below 40%, since taking equity increases risk.
Calculate your DTI:
- Add up all monthly debt payments (mortgage, car loans, student loans, credit cards, etc.)
- Divide by your gross monthly income
- Multiply by 100 for your percentage
Each lender has slightly different DTI guidelines, so comparing offers can help you find the best terms for your situation. Use a refinance calculator to check your eligibility based on your credit score requirements and estimate potential savings.
Cash-out refinance requirements: tapping your home's value
Want to access your home's equity through refinancing? Cash-out refinances let you borrow against your property's value, but come with stricter requirements than standard refinances.
Why cash-out refinances face tougher standards
Cash-out refinances increase your monthly payments, which explains why lenders scrutinize your mortgage payment history and credit habits so closely. For most cash-out options, your name must appear on the property title for at least six months with jumbo or VA loans, while conventional and FHA cash-out refinances typically require a full year of ownership. Some exceptions exist for inherited homes or delayed financing situations.
Cash-out refinance requirements by loan type
| Loan Type | Minimum Credit Score | Maximum LTV | DTI Ratio | Cash Reserves | Appraisal | Income Verification |
|---|---|---|---|---|---|---|
| Conventional | 620 | 80% | 36%-43% | For closing costs | Yes | Yes |
| FHA | 580 | 80% | Varies | For closing costs | Yes | Yes |
| VA | Usually 620 | 90% | 41%-43% | For closing costs | Yes | Yes |
Note: These figures serve as guidelines. Your exact requirements may vary based on your lender, refinance type, and financial situation. For example, with Better's FHA and VA streamline refinances do not require income verification or appraisals.
Key qualification factors for cash-out refinances
âś… Credit score requirements
Cash-out refinances need higher scores than standard refinances—typically 640-680 minimum versus the 620 baseline for conventional loans. Your current loan must show no late payments in the past 6-12 months.
âś… Loan-to-value ratio limits
Most lenders cap cash-out refinances at 80% of your home's value, ensuring you maintain at least 20% equity. VA loans offer more flexibility for qualified veterans, sometimes allowing up to 90% LTV.
âś… Debt-to-income ratio standards
Your DTI faces stricter limits with cash-out refinances. Lenders generally prefer a DTI below 40% for cash-out options, compared to the 43% threshold for standard refinances.
âś… Cash reserves and closing costs
You'll need sufficient funds for closing costs (typically 2-5% of the loan amount). Some lenders require additional cash reserves—especially for jumbo loans, where reserves covering one year of expenses might be mandated.
The appraisal process
The appraisal affects cash-out refinances since the lender must determine exactly how much equity you have available for borrowing. Unlike some streamline refinance options, appraisal waivers are rarely granted for cash-out transactions. That said, lenders like Better sometimes use AVMs (or automated valuation models) to skip the wait and cost of traditional appraisals.
Income verification standards
Lenders will require documentation such as:
- Recent pay stubs
- W-2s
- Tax returns
- Proof of additional income sources
Self-employed borrowers face additional requirements, including profit-and-loss statements and two years of business tax returns.
Refinance requirements: FAQs
What income requirements are needed for a refinance?
More than income, your debt-to-income (DTI) ratio affects loan eligibility. Someone with moderate income and low debt may qualify for a loan while someone with a higher income and more debt struggles to qualify.
Do I need title insurance to refinance?
Yes, most lenders require title insurance when refinancing. While you purchased title insurance with your original mortgage, that policy protected only the original loan. A new refinance loan needs new title insurance to guard against any liens or claims that might have appeared since.
You may qualify for a "reissue rate," offering a discount on your new policy. If title insurance costs concern you, look into no-closing-cost refinance options, though these typically come with slightly higher interest rates.
Do I have to refinance with the same lender?
Not at all. You're free to shop around for refinance rates from any lender, regardless of who holds your current mortgage. Comparing offers often leads to better terms and significant savings.
Final thoughts on refinancing requirements
Refinancing your mortgage can improve your personal finances by lowering monthly mortgage payments or cutting into long-term interest charges.
Lots of variables work together to determine whether you qualify and how much you could save.
To see how all these variables work together for you, start with a mortgage pre-approval. Better's pre-approval process can show results in as little as three minutes.
....in as little as 3 minutes – no credit impact