It is an age-old question – how much home equity do you need to secure a refinance? The answer is not as simple as the question, though. It depends on the program you choose. The parameters are different for FHA, VA, conventional and subprime loans. Here we will look at each program to give you an idea of what to expect.
The good news is, however, that you do not need the fabled 20% equity in order to refinance. There are many options to help you work around that number that keeps many people from refinancing. If you have a goal to refinance either to save money or to take cash out of your home, you should know the different parameters of each program.
Conventional Loans and Home Equity Requirements
Conventional loans have the stigma of requiring 20% home equity in order to refinance. While it is true that an LTV lower than 80% would help you, it does not preclude you from refinancing. Here is how it works:
- If you have an LTV lower than 80%, you do not pay Private Mortgage Insurance. This could help you save even more money in the long run.
- If you have an LTV between 80 and 95%, you may still be eligible for a conventional refinance, but you will have to add PMI to your mortgage payment. This also affects your debt ratio since your payment will be higher, so you have to make sure you qualify with the higher payment.
The type of refinance you plan to do also controls whether or not you could use conventional financing. Generally, if you plan to take cash out of the equity in your home, you cannot have an LTV higher than 80% with conventional financing. If you plan to do a rate/term refinance, though, you can typically secure a higher LTV while paying PMI.
FHA Loans and Loan to Value Requirements
FHA refinances are a whole different ballgame. It starts with whether you wish to take cash out of the equity of your home or simply refinance to reduce your interest rate and/or payment. If you wish to take cash out, you will have to go through the full verification process all over again. Generally, you cannot refinance higher than 85% of the value of your home if you take cash out of the equity with an FHA loan.
If, on the other hand, you just wish to lower your payment, you might be eligible to use the FHA Streamline Refinance. This program looks at refinancing in a whole new way. Your LTV does not matter with this program; in fact, you could even be upside on your home, meaning you owe more than it is worth and still secure FHA financing. This is because the FHA Streamline program does not require you to verify your income, employment, credit or the value of your home. As long as you made your housing payments on time for the last 12 months, with no more than 1 late payment during that time (not during the 3 months immediately preceding application), you can use this program.
The one thing that any FHA refinance requires, whether it is a cash-out or Streamline Refinance, is mortgage insurance. There are no LTV differentials in this case; every borrower with an FHA loan pays FHA mortgage insurance for the life of the loan.
VA Loans and their Requirements
VA loans also have a streamline option that is very similar to the FHA Streamline. If you know you do not need to take cash out of the equity of your home and you simply want to lower your interest rate, the VA IRRRL program could work. This program, called the Interest Rate Reduction Refinance Loan helps you secure a lower interest rate with very little verification. Like the FHA program, you do not need to verify your income, employment, credit or the value of your home. You have to have timely mortgage payments and the new loan must increase your disposable income.
If you wish to take cash out of the equity of your home with a VA loan, you will need to provide proper verification of your income, employment and the value of your home along with a qualifying credit score. The maximum LTV allowed by the VA for a cash-out loan is 100% of the value of the home, but most lenders will not go above 90% in most cases.
Jumbo Loans are a Different Program
Jumbo loans are in another category all on their own. They are a “subprime” loan because the loan amount exceeds conventional limits, so every lender has their own requirements. There are no guidelines or rules regarding these refinances. If you have a loan that exceeds the national conforming limit of $647,200, you should shop around with different lenders to see what options they have available to you for your refinance.
As you can see, the required LTVs for home equity loans are different across the board. You need to first determine what type of program you will use in order to determine if you have the right LTV to secure a new loan. The largest factor is whether you need cash out of the equity of your home or you just want to refinance to make your payment more affordable. From there, you have many options to choose from, giving you options when you try to refinance your home.
