How Do You Qualify to Refinance Your Mortgage?

Refinancing is the process of obtaining a new mortgage in an effort to reduce monthly payments, lower your interest rates, take cash out of your home for large purchases, or change mortgage companies. Most people refinance when they have equity on their home, which is the difference between the amount owed to the mortgage company and the worth of the home. Lenders have tightened the guidelines they use to evaluate loan applications. That means borrowers who want to refinance their mortgage to take advantage of low interest rates may wonder whether they will qualify for a new loan.

Jenifir Dimo, a real estate attorney, with Stewart, Melvin & Frost is with us this morning to talk about what it takes to refinance your mortgage.

Stewart, Melvin & Frost is one of Northeast Georgia’s oldest and largest regional law firms and is widely respected as an “Uncommon Practice” – the firm features an experienced team of attorneys, each of whom is recognized as an expert in highly specialized areas of the law.

Question: What are the factors to consider when contemplating refinance your home?

Jenifir: Home equity, income and credit score are the three main factors. With your home equity, the property value has to exceed the refinance amount. The total of refinance payment plus other debts should be less than 43 percent of gross income. Your credit score should exceed lender minimums which normally range from 620 to 660.

Question: We know the importance of a good credit score. How much weight is it given in a refinance?

Jenifir: It’s an important consideration when you are trying to qualify to refinance your mortgage. Lenders look at all factors, debt-to income ratio, loan-to-value ratio and credit history. Where you credit score will make a difference is with your interest rate.

If you’ve always paid your bills on time, lender will most likely offer you a lower interest rate. If you’ve had some issue with your credit, there interest rate and terms you are offered might be high.

Question: Income is a factor whether determining if you qualify for a refinance but what about your debts?

Jenifir: Your debt is considered against your income. Lenders use a debt-to-income ratio to weigh your monthly income and debt payments. You will need to document your income through recent paycheck stubs and W-2 forms.

Traditionally, the debt-to-income ratio should be no more than 38 percent. There are some lending programs that are more flexible and allow a larger DTI ratio. You can meet with a lender to discuss your DTI and if it is good enough for a refinance. You may need to work on lowering your debt before trying to refinance.

Question: What determines how the amount you can refinance?

Jenfir: That’s determined by your loan-to-value ratio. It’s a fairly simple formula. Most lenders want your loan-to-value ratio to be less than 80 percent. An example is if your home is worth $175,000 and you want to borrow $125,000, your LTV is 71 percent.

If your LTV is higher than 80 percent, there are some loan programs that a more flexible such as the Making Home Affordable program. It’s available to homeowners whose loans are backed by Fannie Mae and Freddie Mac and the home owner must have consistently paid their mortgage payments.

The Federal Housing administration also has a program available to borrowers who have a FHA-insured loan. It’s best to speak with multiple lenders to determine your options.

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