A mortgage refinance is a popular option amongst homeowners because of all the benefits that could come along with one. When you refinance a mortgage, you may be able to reduce your mortgage rate, lower your monthly payments, and save thousands over the course of the loan. There are three types of mortgage refinances to be aware of:
- Rate and Term Refinance
- Cash Out Refinance
- Cash In Refinance
Each of these refinances have their own benefits for homeowners. That is why it is important to understand your options before figuring out who qualifies for a mortgage refinance.
Rate and Term Refinance
When homeowners want to change their mortgage rate (interest rate) and loan terms (the repayment time frame of the loan), then they usually consider a rate and term refinance. This is a great option for homeowners that ultimately want to save money with their mortgage refinance.
Cash Out Refinance
This is a popular option among homeowners because it provides the opportunity to tap into home equity. The amount of home equity that you have is not liquid cash that can be easily accessible. That is why people must consider a cash out refinance, a Home Equity Line of Credit (HELOC), or a home equity loan in order to get these funds. Homeowners that choose this option can even update their rate and term as well! The funds from the equity are typically given to the homeowner during closing.
Cash In Refinance
This is basically the opposite of a cash out refinance. During closing, homeowners that choose a cash in refinance can provide additional funds in order to reduce the overall amount that they owe. Homeowners choose this option when they want to lower their loan to value ratio (LTV). This loan to value ratio is important especially to people that have private mortgage insurance (PMI). In some types of loans, once the homeowner reaches a loan to value ratio of at least 80% then they may be able to drop their PMI. This can help homeowners save on the cost of monthly expenses!
What is a Loan to Value Ratio?
This ratio is a number that is used by lenders in order to see the amount of risk they take on with a secured loan (think of a home loan with a mortgage refinance). The relationship between the amount of the loan compared to the market value of the asset is measured with this ratio. It’s actually pretty easy to calculate your LTV! You would take the amount owed on the loan divided by the total appraised value of the asset. This number would then be multiplied by 100 to get the actual percentage.
Who Qualifies for a Refinance of a Home?
There are six basic requirements that you can expect to meet when it is time to refinance your home. The requirements will vary depending on the type of loan you get. There are countless options available so it is important to discuss the specific criteria eligibility with your lender before submitting an application. Some of the common requirements that you can expect to encounter are:
- The status of the current mortgage in good condition
- Current age of your existing mortgage
- Amount of Home Equity
- Ensure your credit score is at least 580
- Have a qualifying debt to income ratio (DTI)
- Make sure you have funds for the close of the refinance
These are the bare minimum aspects to consider as eligibility requirements before submitting an application to refinance your mortgage. Again, it is still important to speak to your lender to discuss the specifics!
The Status of the Current Mortgage is in Good Condition
A mortgage is a home loan that requires proper management. If you have late payments and/or missed payments on your current mortgage then those will need to be sorted out before you refinance. While every lending institution has their own criteria and requirements, almost all (if not all) want to make sure you are able to responsibly handle your current mortgage before refinancing a new one.
If the reason you want to refinance is because your current mortgage is too unmanageable then make sure to speak to your current lending institution. They may be able to help you find a more flexible way to handle your existing mortgage.
Current Age of Your Existing Mortgage
Depending on the mortgage you are looking to get, you may need to wait a specified time frame between the close of your original and the close of a mortgage refinance. Not every lender will have this rule but some want to see that you have “seasoned” your current loan before going to a new one.
Amount of Home Equity
Your home equity is essentially how much of your home that you actually owe. In order to find out the amount of home equity that you have, you will need to take the value of the home and subtract what you owe on the mortgage. This remaining difference is how much home equity you have. For example, if your home is worth $250,000 and you owe $175,000 then you have $75,000 of equity in your home. As you continue to make payments on your mortgage, the amount of home equity will go up!
Ensure Your Credit Score is At Least 580
Each financial option that you look at will have its own requirements in regards to a minimum credit score. A good rule of thumb is to have a minimum credit score of 580 when looking at government backed loan options. If you are looking for non government backed options then you should try to have a minimum credit score of 620. Generally, the better the credit score then the better the mortgage refinance terms.
Have a Qualifying Debt to Income Ratio (DTI)
Your DTI is exactly what it sounds like. It looks at your debt (the money you are obligated to spend) compared to your income (the money you bring in). Your DTI is the total percentage of your monthly income that you pay towards the amount of debt that you are responsible for.
Mortgage refinances look at your DTI when determining your application status. Every lender is different (we know we sound like a broken record!) but you can usually expect to see lenders looking for a DTI threshold below 43%.
The higher your DTI then you can likely expect a higher mortgage rate. Regardless of the threshold, lenders usually set a minimum requirement that must be met. If your DTI is too high then the lender may deny your application.
Make Sure You Have Funds for the Close of the Refinance
The amount of closing costs you will need to pay varies. You can expect to see that a refinance will cost between 2% to 5% of the total loan amount. When looking at your refinance options you may come across refinances that are advertised as “No Closing Cost Refinances”. While this may seem like a good deal right away, it is important that you understand what actually goes into this.
No Closing Cost Refinances
Lenders know how unappealing closing costs can be for homeowners during the refinance process. That is why some offer “no closing cost refinances”, but how can this be? Well the lenders don’t actually just get rid of the closing costs. Instead, they roll all of the costs into the total amount of the loan or the lender accepts a “lender credit” that covers your closing costs in exchange for a higher interest rate for the duration of the loan. These may be good for your budget currently since you don’t need to worry about closing costs right away, but you may end up paying more over the lifetime of the loan with this set up.
Eligibility Requirements Vary by Lender
We will keep repeating this! It is important to remember that each lender has their own rules and criteria set for who qualifies for a mortgage refinance. Some financial institutions have tougher requirements than others. When looking for a mortgage refinance lender, you don’t need to stick with your current one. You can comparison shop and look for other options.
Commonly Asked Questions
A mortgage refinance can be complicated, especially for homeowners that have never had to deal with one before. There are some commonly asked questions by homeowners that may be able to help you better understand the mortgage refinance process and what it entails.
Will I Qualify for a Refinance?
There is no way an article on the internet can determine whether or not you will qualify for a refinance. If you have a 780 credit score, have made consistent on time payments on your current mortgage, have a low DTI and a good LTV, then you will qualify for a refinance. However, this example is the best of the best. Your individual qualification status will depend on the lender.
In order to find a good place for a mortgage refinance, you will want to compare your options. However, comparing your options can negatively impact your credit score if you don’t handle the process correctly. When looking for mortgage refinance lenders try to keep the application window within two weeks. This will allow you to submit multiple hard inquiries while minimizing the impact to your credit score. Hard inquiries are required to give lenders a full look at your financial situation during the application process. One hard inquiry can negatively impact your credit by about 5 points. The level of impact will decrease over time and eventually these hard inquiries will fall off after about two years.
Can You Get Denied for a Refinance?
Unfortunately, yes. You may be denied when you submit a mortgage refinance application even though you currently have a mortgage that you were approved for. However, while one mortgage program/lender may not work for you, another one may. You will need to discuss options with your lender to find which mortgage refinance would be best for your situation specifically. Make sure to compare your options!
Can I Refinance Without My Spouse?
Many married couples own a property together. However, there may be situations where one spouse wants to refinance the property without the other spouse. That’s okay! The rules vary by state but for a majority of states, you can expect to deal with common law.
Under the common law system, spouses have the option to either own property together or separately. This means it matters who is the owner of the home. If you are the sole owner of the house then you can refinance without your spouse’s signature/consent. However, if you own the property together and both want to remain borrowers on the refinance loan, then your spouse would need to go through the application process with you. If you want to completely remove your spouse then a mortgage refinance may be able to achieve this as well. Check with the lender about the laws in your state.