3 things to consider first
Mortgage refinancing may seem like an excellent way to qualify for a lower loan payment or to utilize the value of your home to your benefit. While refinancing is a good option for many people, not everyone has finances that are healthy enough for refinancing. Before you consider refinancing your mortgage, arm yourself with knowledge about what goes into a refinancing loan, and how your financial hygiene can qualify or disqualify you for a new loan.
Credit Score
Your credit score must be healthy enough for a refinance before you consider refinancing. Just because you qualified for a mortgage at one point, does not mean your credit score is healthy enough to be eligible for a mortgage refinancing. Because a credit score is fluid, it is essential to keep on top of your credit report and to understand how your debts and your payment history affect your score.
Traditional mortgage lenders look for a credit score above 620 when considering a loan, but some lenders will look at applicants with scores as low as 580. The higher your score, the more likely you are to qualify for a loan at a reasonable rate. Before you consider refinancing, you’ll want to look at your credit report and see if there is any way to raise your score—this may include paying down debts, or having inaccurate information removed from your report.
Debt-to-Income Ratio
Your debt-to-income ratio is a simple calculation of money in versus money out. To decide if your finances are healthy enough for mortgage refinancing, a loan officer will look at your current debts, your current income, and how the new payment would affect your liquid cash.
Your exact debt-to-income ratio is calculated by dividing the sum of your monthly debts into your gross monthly income. For example, if you make $5,000 a month before taxes, but you pay out $1,500 per month in debt payments (this includes student loans, auto loans, personal loans and credit card debts). The number you are left with is a percentage. In this case, your debt to income ratio would be 30%. The means, each month 30% of your income goes toward paying outstanding debts.
Each lender will set a different debt-to-income ratio that they are comfortable with, but the vast majority of well-known lenders tend to look for a debt-to-income ratio under 36% when considering mortgages and refinances. There are, however, lenders that will consider applicants who have a debt-to-income ratio up to 50%.
Loan-to-Value Ratio
When refinancing, your loan-to-value ratio must meet specific criteria. In most circumstances, the loan amount cannot exceed more than 80% of the property’s value. If the property is worth $500,000, a loan amount should not exceed $400,000. When looking at your refinancing options, you’ll need to figure out if your current mortgage is less than or greater than the value of the home. A property appraisal will give you an idea of the property’s value. From the assessment, you’ll be able to figure out whether or not your loan-to-value ratio is favorable for refinance.
There are a lot of factors that go into figuring out if an applicant’s finances are healthy enough for a mortgage refinancing. While these three factors are essential, you’ll want to speak with a mortgage expert before making a final decision on your refinancing options.
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