What Are the Requirements to Refinance a Mortgage?

To refinance, you need to meet the lender's limits on four things: credit score, debt-to-income ratio, equity, and your payment history on the current loan. For a conventional refinance, that generally means a debt-to-income ratio of 50% or less, at least 5% equity for a rate-and-term refinance (changing the rate or loan length without taking substantial cash out), and at least 20% equity left after a cash-out refinance. FHA and VA set their own limits, and streamlined refinances of FHA and VA loans skip some of these checks.

What does the lender check?

Manual underwriting means a lender's underwriter evaluates your finances without relying on automated approval. Reserves are qualifying assets left after closing, measured in months of housing payments including taxes and insurance.

These limits are for a one-unit home you live in. Second homes and rental properties have lower LTV caps, and jumbo loans (loans above the conforming loan limit) follow each lender's own rules. Refinancing FHA, VA, jumbo, and USDA loans covers each program's options.

Individual lenders can set stricter minimums than the program does, so a lender that turns you down at 640 does not mean every lender will.

How much equity do you need to refinance?

Equity is your home's value minus what you owe on it. Lenders measure it as the loan-to-value ratio (LTV): the new loan amount divided by the appraised value.

• Rate-and-term, conventional: as little as 5% equity (95% LTV).
• Rate-and-term, FHA: as little as 2.25% equity (97.75% LTV) with a credit score of 580 or higher.
• Cash-out, conventional or FHA: the 80% limit applies to the conventional loan amount or the FHA base loan before financed upfront mortgage insurance. Financing that FHA premium can leave less than 20% actual equity.
• Cash-out, VA: the new loan can be up to 100% of the value, and lenders can set a lower cap.
• To avoid private mortgage insurance: Fannie Mae requires mortgage insurance on a conventional loan above 80% LTV, so you need 20% equity to refinance without it. Will refinancing lower my PMI? shows when a refinance removes it.

Worked example. Your home appraises at $400,000 and you owe $310,000.

• Current LTV: $310,000 / $400,000 = 77.5%, so you have 22.5% equity ($90,000).
• A conventional rate-and-term refinance of the $310,000 balance is within the LTV limit and, at 77.5% LTV, needs no mortgage insurance. Approval still depends on the lender's review of your credit, income, debts, and payment history.
• The largest conventional cash-out loan or FHA base loan is 80% x $400,000 = $320,000. After paying off $310,000, that leaves at most $10,000 in cash, and less if closing costs come out of the loan. Financing FHA's upfront mortgage insurance can raise the total balance above $320,000.
• If the appraisal comes in at $380,000 instead, the LTV on your current balance is 81.6%. A conventional refinance would then need mortgage insurance, and the 80% cash-out limit ($304,000) would be lower than what you owe, so no cash-out is possible.

What is home equity? explains how equity builds through payments and price changes.

What payment history and documents do you need?

Payment history. Lenders check the last 12 months of mortgage payments. FHA's rules are specific:

• FHA rate-and-term: three or more payments more than 30 days late, at least one 60-day late payment plus at least one 30-day late payment, or any payment more than 90 days late in the 12 months before FHA assigns the new loan's case number sends the loan to manual underwriting, which uses the lower debt-to-income limits in the table above.
• FHA cash-out: you must have made every payment within the month due for the past 12 months.
• FHA streamlined refinance: by the date FHA assigns the new loan's case number, you must have made at least six payments, six full months must have passed since the first payment due date, and at least 210 days must have passed since closing. You generally need all mortgage payments made within the month due for the most recent six months, with no more than one 30-day late payment in the six months before that. Payments on the home's mortgages must also be made within the month due for the month before the new loan's funds are paid out.

Income documents. Expect to provide recent pay stubs and W-2s, or tax returns if you are self-employed, so the lender can calculate your debt-to-income ratio (DTI), your monthly debt payments divided by your gross monthly income. The new mortgage payment counts in that ratio. What is debt-to-income ratio? shows the calculation.

Appraisal. A rate-and-term or cash-out refinance usually needs a new appraisal to set the value used for LTV. FHA streamlined refinances need no appraisal.

Credit. Your score sets both approval and price. What credit score you need to refinance shows how lenders price lower scores.

What if you owe more than your home is worth?

If your LTV is above 100%, a standard conventional refinance is not available, and Fannie Mae's High LTV Refinance Option for underwater borrowers has been paused. Your options depend on the loan you have now:

• FHA loan: an FHA streamlined refinance does not use an appraisal, so the home's value does not block it. A non-credit-qualifying version skips credit score and income checks and generally requires the same borrowers. You must still meet the timing and payment-history rules above, and the lender must confirm the refinance provides FHA's required financial benefit.
• VA loan: a VA Interest Rate Reduction Refinance Loan (IRRRL) replaces a VA loan with a new VA loan at a lower rate, and VA's credit and income underwriting standards generally do not apply to it.
• Conventional loan: a cash-in refinance lets you pay down the balance at closing to reach 95% LTV, or 80% to avoid mortgage insurance. In the example above at a $380,000 value, paying $6,000 at closing brings the balance to $304,000, or 80% LTV.

If none of these fit, keep paying the current loan and recheck your LTV after a year of payments or a rise in local home prices. What refinancing means compares the refinance types side by side.