Most homeowners I speak with about refinancing are aware that they’ll need to verify their income, just as they did when they originally purchased their home. However, they don’t always remember the exact income requirements, or they may think they’re different since they now have some equity in their property.
But regardless of whether you’re purchasing a home or refinancing one you already own, the process is basically the same: lenders want to see two years of employment history and an income level that supports your mortgage payments.
I’ll walk you through the specific income requirements you need to meet when refinancing and go over some tips and strategies that may make qualifying a little easier.
Why Income Matters When Refinancing
One of the most important factors that lenders evaluate when considering any mortgage – whether it’s for purchase or refinance – is if the borrower has the necessary level of income to reliably repay their loan.
This doesn’t mean that someone with a high income will automatically be approved, though. I’ve talked to homeowners who earn $300,000 a year – whose applications are otherwise fantastic and should be slam-dunks – and had to deny them because they don’t meet our income requirements.
Conversely, I’ve had folks who earn far less, well below the average in their area, whose applications breeze through to approval.
Why? Because when it comes to mortgage lending, it’s not your actual income that matters, but how it compares to your overall debt obligations.
Debt-to-Income Ratios and Their Role
Your debt-to-income (DTI) ratio is at the core of lender income requirements. This is your monthly debt divided by your total monthly income.
For example, if you earn $4,000 per month, are applying for a $1,500 monthly mortgage, and have no other outstanding debts, you have a DTI of 37.5% which is great. You’ll meet the income requirements for just about any refinance program out there.
On the same note, if you have a $20,000 monthly income, are applying for a $7,000 per month mortgage, but have $5,000 in car payments, personal loans, and credit card minimums, this equates to a DTI of 60% and you’ll have a difficult time finding a lender willing to approve you.
The maximum allowable debt-to-income ratio depends on the lender and mortgage product you’re using. A good rule of thumb is to keep your DTI around 46%; in general, that will get you in the door for most refinance loans.
What’s the 28/36 Rule?
Technically, there are two different debt-to-income ratios – the back-end (or total) DTI, which is what we’ve talked about so far, and the front-end (or housing) DTI, which only takes into account your housing expenses.
If you’ve seen online mortgage “experts” talking about the 28/36 rule, they’re referring to these two ratios. This line of thinking recommends keeping your housing DTI at 28% or below and your total DTI no more than 36%.
Don’t get me wrong—these are great targets to aim for. But are they realistic in today’s mortgage environment? Probably not for most homeowners.
Based on the borrowers I work with, I’d say around 80% have a front-end DTI between 25% and 35% with a back-end DTI above 40%. Lower is always better, but as I mentioned before, a total DTI of 46% will allow you to meet most refinance income requirements.
How High of a DTI Will Lenders Allow?
Different types of refinances have different standards that lenders must follow. Additionally, mortgage companies sometimes establish their own more restrictive criteria, referred to as overlays.
But in general, the maximum allowable DTI based on program guidelines is:
| Loan Type | Maximum DTI |
| Conventional | 50% |
| FHA | 56.9% |
| VA | Varies by lender |
| USDA | 44% |
You probably noticed in the table above that there’s no specific maximum debt-to-income ratio for VA loans. That’s because the program doesn’t have a fixed limit, but lender overlays typically range between 41% and 50%. However, it may be possible to get approved with a higher ratio.
In some cases, borrowers who have government-backed loans through the FHA, VA, or USDA may be able to refinance regardless of their DTI. Similarly, conventional borrowers could be approved with a DTI up to 65%. We’ll go over those scenarios in just a little bit.
Types of Income That Can Qualify
It’s important to point out that not all sources of income will count towards your DTI when refinancing your mortgage. If an income stream is unstable or unreliable, your loan officer likely won’t be able to use it.
So, what types of income can qualify? Some of the most common sources include:
- Full-time employment where you receive a W-2
- Part-time jobs you’ve had for at least two full years
- Self-employed income – including freelance and gig work – with at least two years of income history
- Commissions or bonuses you’ve been receiving for at least two years
- Retirement income
- Social security or disability income
- Alimony or child support with at least three years of remaining payments
Different types of income will have varying requirements, which your loan officer will guide you through.
However, wage or salaried employees who receive a W-2 will find the process the smoothest. As a full-time employee, you typically need a two-year work history, but it doesn’t necessarily have to be with your current company.
You could change jobs three times every year—it doesn’t really matter as long as it’s full-time in a similar field.
Where I do see a lot of income issues is when folks work part-time or have recently started a side hustle, such as driving for Uber. Even if they’ve been earning this income for a while and reported it on their last tax return, I’m not able to use it since they need proof of two full years of part-time employment.
Self-Employed Borrowers
Self-employed borrowers face their own unique set of challenges when trying to meet the income requirements for refinancing their home. This is primarily due to the fact that the lending world and the tax world are at odds with each other.
What I mean by that is when you’re self-employed, there are plenty of items you can deduct from your taxes. But when you take these deductions, you’re lowering your taxable income. This helps to reduce your tax burden, but to lenders, it makes it appear that you didn’t earn as much money as you actually did.
The end result is that it can be nearly impossible to refinance a loan if you deduct too much of your self-employed income. If someone makes $300,000 a year but, because of deductions, only reports $30,000 in taxable income, that’s all I can use. My hands are tied.
Recently, I was working with a dentist – she had been a dentist for more than 20 years and owned her own practice. She was unquestionably a high earner. But when I obtained a copy of her tax returns, I noticed that she had written off so much that she actually showed a loss.
She said that she had other streams of income, but these weren’t reported on her taxes, so I couldn’t use them.
Ultimately, I wasn’t able to help her refinance her mortgage.
Refinancing With an Employment Gap
We’ve already covered how employers want to see two years of consistent and stable income, but what if you have an employment gap during that period? Can you still refinance?
Oftentimes, yes.
If you were only out of work for a few months, that’s not usually a big deal. It’s when you go six months to a year or more without working that it may be a concern. But that won’t inherently keep you from meeting a lender’s income requirements.
There’s always a reason for an employment gap. For example, I’ve worked with several folks – both men and women – who were stay-at-home parents but then had to re-enter the workforce following a divorce, and we were able to sort out their income despite an extended employment gap.
I even did a loan for a gentleman six months ago who was a full-time W-2 employee at his current job for a year. He had a good, stable income. However, before that, he had a 12-year job gap, during which he moved states to care of his father.
We had to go back 12 years to when he last worked full-time. But because he had a legitimate reason for not being employed, we were able to season that job gap, and he ended up closing on his loan. It took a lot of effort, but we managed to get it done.
The bottom line? Lenders are willing to take into account the reason why you were out of work. Maybe you dealt with major surgery or had a child. Perhaps you’re the leading specialist in aardvark DNA research, but your grant was cancelled, and another university finally received a grant to do the same thing a year later – that’s a perfectly logical reason for an extended work gap.
At the end of the day, it’s about your ability to repay your loan. There’s a lot of leeway for borrowers with employment gaps, so long as they have a good reason.
Student Loan Debt Impacts Income Requirements
One of the biggest issues we’re seeing right now is student loans. Many of the people I talk with have student debt – $50,000, $100,000, or even more – and they’re not currently required to make payments on it.
But even though the debt isn’t impacting their monthly budget, we’re still obligated to include it in their DTI.
Say they have $200,000 in student debt and their loans are being deferred – we’re required to add in a payment at a rate of 0.5% of their total balance. In this scenario, that would be $1,000 per month, which can really affect someone’s DTI, especially if they’re relatively early in their career.
Then there are people working in industries that give student loan relief – such as social workers – who will have their loans forgiven after ten years of employment. But if they need to buy or refinance in the meantime, that payment still counts against them.
Do Refinance Income Requirements Differ From a Purchase Loan?
Many of my refinance clients come in thinking that, since they have built up some equity in their home, the income requirements will be more relaxed than when they initially took out their loan.
Unfortunately, that’s not the case.
Income requirements for a refinance transaction don’t really change. A refinance doesn’t allow any extra leeway – such as a higher debt-to-income ratio – just because you already own your home.
Not long ago, I spoke with a past client. He called me wanting to do a cash-out refinance and use the equity he’d gained through appreciation to buy a rental property.
His financial profile back then was great – he had an acceptable DTI, and everything else looked good. But since then, he’d purchased two new vehicles and taken on $1,800 in additional monthly debt payments.
I explained that his income level didn’t support the size of the refinance he was looking for.
“Well, I qualified before and earn even more now,” he said. To that, I responded, “But you didn’t have $1,800 in car payments back then.”
There’s only one requirement that may change, and it isn’t in the borrower’s favor. If you’re debt ratio is above 45% or so – and this is somewhat lender specific – for a conventional cash-out refinance, you may need to have six months of your housing expenses in reserve.
For example, if your monthly all-in mortgage costs are $3,000, you would need to have $18,000 in available funds.
What Documents Will I Need to Prove My Income?
Most borrowers – those who are wage or salaried employees – will need to provide a full month’s worth of pay stubs and two years of W-2s and filed income tax returns.
However, many lenders now utilize third-party verification services to simplify this process. In many cases, your mortgage company can automatically access your complete work history, gross income, and other required information.
In this scenario, I don’t need W-2s, pay stubs, or anything else. Not only does this greatly reduce the amount of paperwork my clients need to provide, but it also speeds up the refinance.
For applicants who are self-employed or have other types of income, however, things can get a little more complicated. While requirements will vary by situation, you’ll likely need to provide additional documents such as:
- Personal and business tax returns
- Profit and loss statements
- Balance sheets
- Bank statements
- Business licenses
Refinance Loans That Don’t Require Income Verification
I previously mentioned that some borrowers may be able to refinance regardless of their debt-to-income ratio. That’s because government-backed mortgage programs – those offered through the FHA, VA, and USDA – offer streamline refinance loans that do not require income verification.
First things first, these types of refinance loans are only available to borrowers who currently have mortgages through these programs. For example, you can’t refinance your existing conventional mortgage with an FHA streamline loan.
However, for borrowers who do qualify, these streamline programs typically allow you to refinance with no income verification, no in-depth credit check (it doesn’t matter if your credit score is 200 or 800), and no new appraisal. It’s a much faster and simpler process – these loans are often completed in as little as two weeks.
Note: While both the VA and USDA programs allow you to roll your closing costs into your new loan, FHA streamline borrowers must have the funds to pay these costs upfront.
RefiNow and Refi Possible Loans
Another option for some folks with conventional loans who may not meet the standard refinance income requirements because of a high DTI is the Fannie Mae RefiNow and Freddie Mac Refi Possible loan programs.
Both of these programs allow you to refinance with up to a 65% DTI, regardless of your current credit score.
These are rate-and-term loans designed to help lower-income homeowners refinance into a more favorable interest rate with cheaper monthly payments.
However, these programs have some pretty specific restrictions, and not everyone will qualify. To take advantage of a RefiNow or Refi Possible loan, you will need:
- Qualifying income at or below 100% of your area’s median income level
- To be refinancing a single-unit home that’s your primary residence
- At least 3% equity – you can’t be underwater on your loan
- A current mortgage that’s owned by Fannie Mae or Freddie Mac
- No late mortgage payments within the past six months and no more than one late payment within the past year
- To be able to reduce your interest rate by at least 0.5% and achieve a lower monthly payment
What to Do If You Don’t Meet Income Requirements
Even if you aren’t sure you can meet the income requirements to refinance your home, it’s still worth speaking with a licensed loan officer because there may be some options that you haven’t considered yet.
For example, I had a client looking to refinance, but their DTI was 55%. We were able to do a cash-out loan, which allowed them to pay off some credit card debt, and we got their DTI down to 42%.
They were able to reduce their interest rate on their home loan and save a significant amount each month by wrapping in those credit card payments.
Another common scenario is when someone is overpaying for homeowners’ insurance and they don’t even realize it. By shopping around, they’re able to find a different policy with a lower premium, and that helps bring their DTI down, too.
Or maybe you do have a higher DTI, and in the end, there’s not much we can do about it. But even still, you’ve never missed a single mortgage payment. That’s a check in the good box.
My job as a loan officer is to paint the best picture for the underwriter as to why you should get this loan, and we can deal with a lot of stuff if you’re never late on your payments.
I often reference Shrek and tell my clients, “Loans are like onions – they have a lot of layers.” Yes, this layer may not be the best, but all of these other layers are good, and a lot of times, we can still make a case that gets your refinance approved.
Do You Meet the Income Requirements to Refinance?
Although your income plays a role in the refinancing process, lenders are ultimately more concerned about how it stacks up against your overall debt obligations. If you’re able to keep your total debt-to-income ratio at 46% or below, there’s a good chance you’ll meet the income requirements for most types of refinance loans.
But even if your figure is a little higher, it’s still possible to get approved for a new mortgage to reduce your interest rate and monthly payments or to access the equity you’ve built up in your home. Ready to get the process started? Apply with Refi.com today for a personalized loan estimate.
