Did you know that before you can refinance, you need to have your mortgage for a certain amount of time? It’s called seasoning and many loan programs/lenders require it in order to make sure you are a good risk.
The main reason lenders require seasoning is to prevent borrowers from ‘flipping homes.’ This helps protect the housing market as well as the lenders that provide the loans. If mortgage seasoning wasn’t a thing, investors could buy homes with a mortgage, sell it a month or two later, and pay the loan off in full. The lenders wouldn’t make any money on the loans and the housing industry would feel the effects.
Mortgage seasoning also helps prevent foreclosures. If mortgage seasoning wasn’t required, borrowers could refinance their loans as often as they wanted. Because refinancing costs money, it could run the equity of the home dry, especially if the borrowers wrap the closing costs into the loan. Once the equity is gone, borrowers could walk away from the home, allowing it to go into foreclosure, leaving the bank with a loss.
Refinancing a Conventional Loan
Conventional loans don’t have seasoning requirements if you all you need is a rate/term refinance. In other words, if you are refinancing your loan in order to lower the payment and/or the rate, you can do so as soon as you want after buying the home.
Of course, you’ll need to qualify for the loan before you can refinance. This means having a high enough credit score and meeting the debt ratio requirements of the program, which are typically 28/36 per Fannie Mae guidelines.
If you need to take cash out of your home’s equity, you’ll need to wait at least six months after buying the home. If you still need the money at that point, you can refinance and take cash out of the equity. You should give this option careful consideration, though. If you put the money down on the home, you obviously wanted to keep your payment low or to have equity in the home. If you go and take it out after just six months, you’ll pay closing costs all over again – it basically renders the down payment that you put down useless.
Refinancing an FHA Loan
FHA loans have a strict six-month seasoning period for the FHA streamline program, which is equivalent to the rate/term refinance. In some cases, lenders may even require 12 months of seasoning; it just depends on the lender’s preference.
If you have had the loan for less than six months, you must prove that you made every payment on time. The FHA doesn’t grant you an exception for even one 30-day late payment. Now, if you have the loan for at least 12 months, the FHA does grant a one-time exception to the rule. You can have one 30-day late payment and still qualify for the FHA streamline refinance.
The FHA does allow you to refinance your FHA loan to take cash out of the equity after only owning the home for six months as well. There is a downside to this, though. If you’ve only had the loan for six months, the lender can only use the lesser of the current appraised value or the purchase price of the home. This could negate any equity you thought you built up in the home. It’s best if you wait until you own the home for at least 12 months before taking cash out of it.
Refinancing a VA Loan
A VA loan works much the same as the FHA loan. The VA wants to see timely mortgage payments on your current loan before you refinance. You’ll typically need at least six on-time payments in order to refinance. If you have a history of less than 12 payments, the lender will likely use the original purchase price of the home. This means that you may lose some of the appreciation you may have gained through the home’s current market value.
You should ask yourself if it makes sense to refinance before doing it. When rates get lower, it is easy to get excited about refinancing and saving money. You have to look at the big picture, though. Sometimes, it’s not worth it because you won’t gain as much equity as you thought. If you truly can lower your payment and the closing costs won’t be extremely high, it could be worth it, though, to help you pay your loan off faster.