You must ensure that you are in great financial shape before applying for a mortgage refinancing. This means that if you don’t have the financial qualification, for instance, if you have more debt on your plate than allowed for a mortgage refinancing, then it is probably a waste of time to go through the application process. However, there is a possibility of qualifying for a loan, but at ridiculously high interest rates.
While each lending institution has its own lending guidelines or criteria for evaluating potential borrowers, there are general guidelines that apply across the lending industry.
How to qualify for mortgage refinancing:
1. Home Equity: The value of your property must exceed the amount refinancing. You should have 20% (minimum) equity to refinance your primary residence. Your home equity, which is based on its current appraised market value, is determined by the difference between how much your property is worth and how much you owe on it. The amount you paid for it is not really important in the valuation. Some lenders even require more than 20% equity in order to finance your investment property. Your loan-to-value ratio is also an important determinant. To get your LTV simply take the amount you wish to borrow and divide by the current market price of your home. Most lenders look for an LTV not exceeding 80 per cent, but some programs are quite flexible.
2. Income: How much you make is important in determining whether you qualify for refinancing. Total refinance payment, including other debts, must be less than 43 per cent of gross income. You must earn enough money to make mortgage repayments. There should also be a likelihood that your income will continue into the foreseeable future.
3. Credit Score: Your credit score needs to exceed lender minimums (which is usually 620-660). Your credit history helps determine how likely you are to make on-time mortgage repayments. Homeowners who fail to meet these three fundamental guidelines can consider streamline refinance programs, as they are more flexible. Repaying your bills not only ensures that you qualify for a loan, but also get a good interest rate.
Other criteria for evaluation include:
4: Debt: How much you owe is just as important as how much you make. You should have sufficient cash flow left to remit a mortgage repayment after taking care of your other liabilities.
5: Savings: Ensure you have enough money for a down payment and to pay your mortgage in case your income reduces.
6: Financial ratios: What is your debt to income ratio?
Lenders weigh the borrower’s monthly income against debt repayments using a Debt-to-income (DTI) ratio, and since lenders are characteristically prudent, they look for a DTI ratio that does not exceed 38 per cent. But some programs are flexible enough to allow a higher DTI ratio. If you have a higher DTI ratio, you might consider repaying some of your debts before applying for a refinancing.
If you were wondering how to qualify for mortgage refinancing, the above-named tips will help you evaluate your eligibility for a refinancing. But please note that these are just guidelines, and that the criteria for evaluation may vary from one lender to another.