Conventional Loan Refinance Guidelines for 2024
If and when interest rates drop, homeowners will discover they can refinance their mortgage and reduce their monthly payments. But even though there are several different programs to choose between, most people opt for a conventional loan refinance.
What Is a Conventional Loan Refinance?
Conventional lenders follow mortgage guidelines established by Fannie Mae and Freddie Mac. Lending standards are stricter than with government-backed mortgages, but borrowers with good credit and equity in their homes are likely to qualify for decent interest rates while avoiding upfront and ongoing mortgage insurance fees.
Conventional refinance loans come in two types: rate-and-term refinances and cash-out refinances.
A rate-and-term refinance lets you adjust your mortgage’s interest rate and repayment terms. With a cash-out refinance, you can also withdraw built-up equity from your home.
Do I Need a Conventional Loan to Qualify?
You do not need to have a conventional loan currently to qualify for a conventional refinance. If you meet lending guidelines, you can refinance out of any type of mortgage.
This means that you can refinance conventional, even if you have a(n):
FHA mortgage
VA mortgage
USDA mortgage
Other alternative mortgage type
What Types of Properties Are Eligible?
Just about any type of residential property is eligible for a conventional loan refinance. This includes your:
Primary residence
Second home
Investment properties
This flexibility sets conventional refinances apart. Except under special circumstances, you can’t get an FHA, VA, or USDA refinance for a vacation or rental property.
Plus, you don’t need to have a single-family home to qualify. You can refinance a primary residence or investment property with up to four units.
You get a conventional refinance on:
Conventional Loan Credit Score Requirements
Fannie Mae and Freddie Mac have both set a conventional loan credit score requirement of 620 for most mortgage products.
However, homeowners with credit issues may still qualify for Fannie Mae's RefiNow and Freddie Mac's Refi Possible conventional refinance programs. Both mortgages are limited to single-family primary residences but allow you to refinance without meeting a minimum credit score requirement.
Start your conventional loan refinance.
Debt-to-Income Guidelines for a Conventional Refinance
Lenders also compare how your qualifying income stacks up against your monthly expenses. This metric is called your debt-to-income (DTI) ratio. It is calculated by dividing your monthly debt obligations by your income.
For example, say you earn $7,000 monthly and have $3,000 in expenses between your mortgage, car payments, and credit card minimums. In that scenario, your DTI is just under 43%.
In most cases, qualifying for a conventional loan refinance requires a maximum DTI of 45%. In some situations, however, you may get approved with a ratio as high as 50% if you have sufficient funds in reserve and an otherwise strong financial profile.
Note: With the RefiNow and Refi Possible conventional loan programs, you can refinance your home with a debt-to-income ratio of up to 65%
How Much Equity Do I Need for a Conventional Loan Refinance?
The amount of equity you need to qualify for a conventional loan refinance depends on your property and the type of refinance you're considering.
Rate-and-Term Refinance Equity Requirements
Conventional rate-and-term refinances allow you to reduce your interest rate and cut your monthly payments with less equity than needed for cash-out options.
Type of Property | Minimum Equity Required |
Single-Unit Primary Residence | 3%* |
Multi-Unit Primary Residence | 5% |
Second Home | 10% |
Single-Unit Investment Property | 15% |
Multi-Unit Investment Property | 25% |
*to refinance with 3% equity, your current mortgage must be owned or securitized by Fannie Mae or Freddie Mac. Otherwise, a minimum of 5% equity is required.
Also remember that if you’re doing a conventional loan refinance with less than 20% equity, you’ll be required to pay for private mortgage insurance.
Cash-Out Refinance Equity Requirements
Obtaining a cash-out refinance requires you to have more equity than with a standard rate-and-term refinance. In addition, cash-out refinance interest rates are generally 0.25% to 0.50% higher.
Type of Property | Minimum Equity Required |
Single-Unit Primary Residence | 20% |
Multi-Unit Primary Residence | 25% |
Second Home | 25% |
Single-Unit Investment Property | 25% |
Multi-Unit Investment Property | 30% |
The above is how much equity you'll need left over after you've cashed out your funds.
For Example: If your single-family primary residence is worth $500,000, you could get a conventional cash-out refinance loan for up to 80% of the value, or $400,000. This requires you to leave 20% of the value, or $100,000, as equity. If your current mortgage is for $250,000, you would be eligible to cash out up to $150,000 less closing costs.
Conventional Refinance Loan Limits
Conventional loan limits are established annually by the Federal Housing Finance Agency and vary based on the number of units the property contains.
For most parts of the country, the conventional refinance loan limits for 2024 are:
Number of Units | Maximum Loan Limit |
One | $766,550 |
Two | $981,500 |
Three | $1,186,350 |
Four | $1,474,400 |
Loan limits are higher in some areas with elevated housing costs, including many major cities and the entirety of Alaska, Hawaii, Guam, and the US Virgin Islands.
The conventional refinance limits for these high-cost areas are:
Number of Units | Maximum Loan Limit (High-Cost Areas) |
One | $1,149,825 |
Two | $1,472,250 |
Three | $1,779,525 |
Four | $2,211,600 |
Some markets have loan limits that are between these two maximums. You can use Fannie Mae’s AMI lookup tool to find your area's current conventional loan limits.
Conventional Refinance Closing Costs
Doing a conventional loan refinance means incurring closing costs, much like when you took out the loan to purchase your home. In fact, the costs will be similar in most situations.
You can anticipate conventional closing costs running between 2% and 4% of your total loan balance. However, homeowners with a small mortgage may encounter proportionately higher costs. This results from some fees, like appraisal and escrow services, remaining relatively constant regardless of home value.
For a more detailed breakdown of the charges, check out our article on the cost of a cash-out refinance.
How Soon Can I Get a Conventional Refinance?
The waiting period to qualify for a new conventional loan depends on whether you're applying for a rate-and-term or cash-out refinance.
Rate-and-Term Conventional Refinance
There’s no waiting period for a conventional rate-and-term refinance. If you are able to lower your interest rate or otherwise improve the terms of your mortgage, you can qualify for a conventional refinance loan without meeting any loan seasoning requirements.
If it made sense to do so, you could take out a mortgage and apply for a rate-and-term refinance a month later. Be aware, however, that you might encounter a lender-imposed wait if you’re trying to refinance with your current mortgage company.
Start your rate-and-term conventional refi.
Cash-Out Conventional Refinance
Conventional guidelines are stricter for cash-out refinances. In most cases, you'll need to have had your current mortgage for at least 12 months to qualify. However, this rule only applies to first mortgages. If you have a second mortgage or HELOC that is fewer than 12 months old, you can still refinance so long as your first mortgage is a year old.
You must also have been on the property's title for a minimum of six months in order to be eligible for a conventional cash-out refinance. Lenders can waive this requirement for properties that were inherited or legally awarded through divorce, separation, or dissolution.
Did you recently purchase your property with cash? If you qualify for delayed financing, you can recoup your funds through a cash-out conventional refinance with no waiting period.
Benefits of a Conventional Refinance Loan
Conventional loans are considered the gold standard for home mortgages. While borrowers with bad credit or a significant amount of debt may not qualify for a conventional refinance, those who do can benefit from:
Lower interest rates for borrowers with great credit
The freedom to refinance second homes and investment properties
Eliminating mortgage insurance with just 20% equity
Flexible loan lengths, typically ranging from 10 to 30 years
Both fixed-rate and adjustable-rate mortgages
Higher loan limits than FHA or USDA-backed mortgages
Potentially lower closing costs because you won’t incur the FHA upfront mortgage insurance premium or VA funding fee
What Documents Will I Need for a Conventional Refinance?
Getting a conventional refinance loan means undergoing a credit check and submitting proof of your income and assets, just like when you initially took out your mortgage. To avoid delays in the refinancing process, you should be prepared to provide:
Your current mortgage statement
A copy of your homeowners’ insurance policy
Two years of W-2s and signed tax returns
Your two most recent paystubs
Your two most recent bank statements
Utility bills or other proof the property is your primary residence (if applicable)
Some other documents that may be needed, if they apply, include a:
Letter of explanation for extenuating circumstances behind major credit issues
Letter of explanation for any significant gaps in employment
Gift letter if you’re using gifted funds to reduce your balance, pay closing costs, or cover reserve requirements.
Alternatives to a Conventional Loan Refinance
There are excellent conventional refinance alternatives that can make sense for some homeowners.
FHA, VA, and USDA Streamline Refinances
If you currently have a mortgage secured by the FHA, VA, or USDA, you may be eligible for a streamline refinance. The FHA streamline refinance, VA interest rate reduction refinance loan, and USDA streamlined-assist programs allow you to refinance without an in-depth credit check, income verification, or even an appraisal.
FHA Cash-Out Refinance
If you’ve run into credit issues – especially since you took out your mortgage – your best option for withdrawing built-up equity may be an FHA cash-out refinance. The FHA only offers cash-out refinances on your primary residence, but you can qualify with a credit score as low as 500 and a debt-to-income ratio as high as 50%.
VA Cash-Out Refinance
Homeowners who meet the VA’s eligibility requirements can get a VA cash-out refinance for up to 100% of their property’s value. VA loan rates are among the lowest on the market, although only primary residences will qualify. Plus, unlike conventional and FHA mortgages, VA cash-out refinances have no maximum loan limit.
Second Mortgages and HELOCs
If you want to cash out your home's equity but currently have a below-market interest rate, you might want to consider a HELOC or other second mortgage. Rates will be higher than a standard conventional refinance, but you'll keep your existing loan intact.
Discover Your Conventional Loan Refinance Options
If you have a credit score of 620, a debt-to-income ratio that's no higher than 45%, and meet other equity and seasoning requirements, you can qualify for a conventional loan refinance. To see what options are available to you, check today's rates and reach out to a qualified lender.
