Your home is a valuable asset and investment that you can use during tough economic times to ease some of your financial burdens.
Mortgage refinancing is one of the ways to get some breathing room by cutting down your monthly payments or saving some of your money. According to the experts at Achieve Loans, a mortgage refinance entails trading your current mortgage for a new home equity loan with a new interest rate and principal.
During the process, the lender uses your new mortgage to settle the previous mortgage, thus leaving you with one new loan and monthly payment. Here’s what you need to know about qualifying for a mortgage refinance.
Why Refinance a Mortgage?
Homeowners seek mortgage refinancing for various reasons;
- The need to get some money through a home equity loan
- The need to shorten your loan’s term and lower your periodic loan repayment amounts
- The need to change your loan type
Here are some of the basic requirements you’ll need to meet to qualify for a mortgage refinance.
Qualifying Credit Score
Conventional mortgage refinancing often requires a credit score of 620 and above. Some federal programs, such as the Federal Housing Administration (FHA), often require a credit score that can be as low as 500. But the Veteran Affairs (VA) department is a little different, and they may need no score for some credit facilities such as the interest rate reduction refinance loan.
Qualifying debt-to-income Ratio (DTI)
The DTI ratio is an indicator that shows your lenders your capability to afford your monthly mortgage payments. When calculating the DTI ratio, your monthly debt payments are divided by gross income per month. You’ll often need a DTI of 43% to get a mortgage refinancing. In some cases, if you meet the mortgage refinance requirements for a Federal Housing Administration (FHA) streamline, you can get exempted from this requirement.
Suitable home equity
Your lenders often look at your loan-to-value (LTE) ratio and home equity to determine your ability to finance or get a home equity loan. Equity denotes the current worth of your home, and it’s determined by subtracting what you owe from the current value of your home.
A 5% equity is sufficient for a conventional mortgage refinance. But if the percentage is below 20%, you may face high-interest rates and fees and be compelled to pay mortgage insurance. As an exception, borrowers with FHA loans can borrow even with negative equity, but they’ll need mortgage insurance to fulfill home equity loan requirements.
Sufficient refinancing cost
Customers seeking to fulfill the mortgage refinancing requirements must pay the closing costs or get it included in the new loan value. The refinancing cost often ranges between 2% to 5% of the principal value of the loan. Clients that lack enough refinancing funds may go for the no-closing-cost refinance options.
Updated mortgage standing
Your present mortgage payments should be up to date. It would help if you had no delayed or missed monthly payments to meet the refinancing and home equity loan requirements.
A fulfilled refinance waiting period.
Some mortgage plans need you to wait for a pre-set time to elapse before you can seek mortgage refinancing. The time between your last closing and the new sought-after loan is known as ‘seasoning’ in the mortgage industry jargon. If your lender imposes such a seasoning requirement, you have to wait for the period to end before you can start seeking a refinance.
Proper and enough documentation
The documentation required for a mortgage refinance process to succeed may vary depending on the lender’s needs. But home equity loan requirements may expect you to have the following documents; a filed home appraisal, proof of income, homeowner’s insurance papers, pay slips/stubs, W-2 Forms, and tax returns paperwork. The self-employed customers may also need to present 1099 Forms and profit-and-loss statements.
Refinancing your mortgage may lower your monthly payments and interest rate. You can also switch rates, cash out on your equity or shorten the term of your mortgage repayments. Whichever the case qualifying for a mortgage refinance is essential, and you’ll need to fulfill various mortgage refinancing requirements that vary depending on your finance and mortgage status. As such, consult with your mortgage pros to learn more about what you’ll need to qualify for a refinancing.
