How soon can you refinance a mortgage?

When can you refinance an FHA loan?

FHA loans, backed by the Federal Housing Administration, are granted to borrowers who may not be able to qualify for a conventional loan. These loans have lower requirements for credit scores and down payment amounts and more lenient terms for debt-to-income (DTI) ratios. They do, however, require that the borrower keep mortgage insurance, which increases monthly payments. Because of these terms, they're common for first-time homebuyers or buyers who have not been able to accumulate savings and a strong credit history.

The FHA has two refinancing programs to help borrowers: streamline refinancing and cash-out refinancing.

• FHA streamline refinancing: This is the easiest process for borrowers, since it eliminates the need for an appraisal and income or credit verification and serves borrowers who have a loan-to-value ratio of over 100% (commonly referred to as being “underwater” on your mortgage). There are some stipulations on who can qualify for this program; the borrower must have a loan originated through the FHA, and they must be current on their loan. An FHA refi continues its requirement of mortgage insurance.

  Using the FHA streamline program can allow you to change an adjustable-rate loan to a fixed-rate loan or lower your monthly payment. The streamlining process requires a “net tangible” benefit to the borrower.

• FHA cash-out refinance: To obtain an FHA cash-out refi, you need to have at least 20% equity in your home, a credit score of at least 580 and a debt-to-income ratio of less than 43%, and your loan must be current over the last 12 months.

  The amount of cash you can get is calculated by taking the maximum loan amount (80% of the appraised value of your home) and subtracting from it the outstanding balance on your loan. For example, if your home is appraised at $300,000, your maximum loan amount would be $240,000 ($300,000 x 0.8). If you still owe $220,000 on your first mortgage, you would be able to “cash out” the difference of $20,000.

• FHA refinance as conventional loan: FHA loans can also be refinanced as conventional loans, but you will have to meet the criteria for a conventional loan. Typically, conventional loan lenders want to see an 80/20 LTV (loan-to-value) ratio. Most FHA loans are granted with a 3.5% to 10% down payment, which places your LTV quite a bit higher than the target 80/20. It's still possible to do a conventional refinance with a higher LTV than 80/20, but you will likely have to accept higher interest rates.

  If your original loan was through the FHA and you can now qualify for a conventional loan, there are potential benefits. The biggest is that you could eliminate your mortgage insurance payments. If you’ve had your FHA mortgage for a while, this may be a good option for you, since you’ll be able to lower your monthly payment, eliminate mortgage insurance and qualify for cash-out if you need to.

When can you refinance a VA loan?

VA loans are backed by the Department of Veterans Affairs and are available to veterans and current service members. VA loans offer low interest rates and closing costs and don’t require down payments. A major benefit of a VA loan is that it does not require mortgage insurance.

If you currently have a VA home mortgage, you have two options for refinancing through the VA: streamline refinancing (known as IRRRL refinancing) and cash-out refinancing. You may also be eligible to refinance with a conventional loan.

• VA IRRRL refinancing: An interest rate reduction refinance loan (IRRRL) is a streamlined process for current VA mortgage holders to obtain lower interest rates. It can also be used to change from an adjustable-rate loan to a fixed-rate loan. Different lenders working with the VA will have their own requirements for credit scores. You must have a current VA loan to qualify for a streamline refinance and be able to certify that you currently live or used to live in the home covered by the current VA loan.
• VA cash-out refinance: This type of refinancing package is available to those with existing VA loans and conventional loans, though the applicant does have to qualify as a VA borrower (current or past service member). You have to meet lender-specific requirements for income and credit and live in the home you’re financing with the loan.

When can you refinance a USDA loan?

USDA loans are backed by the U.S. Department of Agriculture. While originally intended to help homeowners in rural America, the program has grown and now includes low-interest loans for suburban areas too. If you're looking to refinance a current USDA mortgage, you have two options besides applying for a conventional refi: streamlined and streamlined-assist. It’s worth noting that no USDA refi methods offer a cash-out option. To do this, you would have to obtain a conventional refi.

• USDA streamlined refinancing: This process for refinancing has the fewest restrictions and requirements for qualifying. Your first mortgage has to be current for at least the last 180 days, and the loan has to be at least a year old. This option is good for borrowers whose primary objective is to lower their interest rate. Although there is no specific LTV, it does require that the new loan amount not be any higher than the original starting loan amount, disqualifying a borrower who may be underwater on their mortgage. This type of refi cannot be used to get cash out.
• USDA streamlined-assist: This program has many similarities to the streamlined refi, but streamlined-assist makes it slightly easier on borrowers since there's no required appraisal, credit or income check or LTV requirement. However, the initial loan has to be current for at least a year, and you must show that your new monthly payment will be at least $50 less than your current payment.

  The USDA also offers traditional nonstreamlined options for refinancing, which can be a good option for those who still may not qualify for a conventional refi. Nearly all the requirements are the same as for an initial USDA loan, and you will have to undergo a credit and income check and have an appraisal performed. There are no requirements as to what the future monthly payments must be.

When can you refinance a jumbo loan?

You can refinance a jumbo mortgage at any time. However, you must first find a lender that’s willing to do it, as many avoid financing them. You will also be held to higher standards to qualify, just like you were for your first jumbo mortgage.

Typically, a lender will be looking for a high credit score (700 to 760, depending on the lender), a low DTI (typically under 36%), an 80/20 LTV and enough cash reserves to cover the monthly mortgage payments.

Jumbo loans can also be eligible for cash-out refis, but options vary by lender. Jumbo loans, as the name implies, are for loan amounts that exceed standard requirements and therefore require extra assurances for the lender, since they are riskier loans overall. Today, a jumbo loan is one that is over $548,250 in most of the U.S. and cannot be insured by Freddie Mac or Fannie Mae.

When can you refinance a conventional loan

There is no set timeline for refinancing a conventional mortgage. The specifics of your current loan, your overall financial picture and the reason for your refi all influence the probability it will be approved.

There is no set timeline for refinancing a conventional mortgage.

Some of the most common reasons people choose to refinance a conventional mortgage include:

• If you can get a lower interest rate: This is by far the most common reason for refinancing a loan. Mortgage interest rates are influenced by the Federal Reserve and fluctuate based on inflation, overall economic growth and housing market conditions, among other things. To give an idea of how much these can shift, in 1981, mortgage rates on 30-year fixed-rate loans hit an all-time high of 18.45%, according to Freddie Mac. In late 2020, they hit a historic low of 2.68%. If you previously locked in a high rate when you signed your first mortgage, you could save tens of thousands of dollars over the life of a 30-year loan by securing a lower rate with refinancing.
• To add or remove a name from the loan: If you need to add or remove a name from the loan, it’s not as simple as making a request to your lender. The new applicant(s) must requalify for the loan on their own, and an entirely new mortgage must be applied for to refinance the first one. This is most commonly done in cases of divorce where one spouse is keeping the primary residence and the other wishes to take their name off the loan. Due to the changing nature of interest rates, this may or may not yield a lower monthly payment on the new mortgage.
• When you want to shorten or alter the terms of the loan: Most conventional loans are 30-year fixed loans, which means it will take 30 years to pay off the loan completely. However, there are other terms available — the most common of which is a 15-year term. To obtain a shorter term, you will have to refinance your current mortgage. Typically lower-term loans can offer lower interest rates, but your monthly payments will be higher. You can also refinance to turn an adjustable-rate mortgage into a fixed-term mortgage.
• To tap into equity in your home: This is commonly referred to as a cash-out refinance. If you are in need of a large sum of money and you have sufficient equity in your home, you can refinance your mortgage for an amount larger than your current loan balance and take the difference in cash. This type of refinancing usually comes with more rigorous standards for approval.

Bottom line: After the hassle of buying a home, does refinancing make sense?

In general, you should consider refinancing if you’re able to obtain a lower interest rate, you have sufficient equity in your home and you know you will stay in your home for several years. It doesn’t make sense to refinance and pay the closing costs if you’re just going to sell it a year down the line.

The first step if you’re considering a refinance is to talk to a lender. Most lenders will give you basic information about your proposed refinance before you even submit extensive documentation or undergo a credit check. If you decide to move forward, the lender will then review your income, credit history and DTI ratio, as well as determine the LTV ratio on your home to see how much equity you have.