Refinance Guidelines
Low interest rates on mortgage loans benefit homeowners who can't keep up with their present home loan payment due to a high rate and high payments or those who simply want to lower monthly payments and pay less interest. A mortgage refinance can quickly solve mortgage problems and help you get a better payment. Before talking with a lender, learn the guidelines and assess whether you're likely to be eligible for a refinance.
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Purpose
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Homeowners choose to refinance for different reasons, but often they refinance with hope of acquiring better, cheaper home loan terms. Adjustable rate and interest-only loans offer low rates during the initial years, but rate adjustments can cause rates to jump and increase mortgage payments. To avoid a jump in payment and lower the risk of foreclosure, owners may opt to refinance their home loan to keep their payments low and affordable.
Considerations
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Credit score is a determining factor in mortgage refinance. Even if you have a present mortgage and have never missed a payment, your mortgage lender (or a new lender) may not refinance the loan if you have a low credit rating. You're considered high risk because the risk of default increases in those with a low credit score. Fix any credit problems such as late payments and aim for a minimum score of 680. A score of 740 or higher gets you the best rates.
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Qualifying
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The value of your house in comparison to how much you owe on the home loan impacts your ability to refinance. Lenders take into account the loan-to-value and like to keep this ratio below 80 percent. Divide your loan amount by the property value to determine the loan-to-value ratio. There are provisions for owners with high loan-to-value ratios. For example, FHA will approved refinances with a 97 percent LTV and VA loan lenders refinance with 100 percent LTV.
Documentations
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You can't refinance a mortgage loan without first verifying your employment and income. Lenders do not accept stated income and you must provide income tax statements, W-2s or paycheck stubs. Depending on the lender, they may request information on your bank accounts.
Costs
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Mortgage refinances are not cheap, and before going through with the process, consider how long you plan to live in the home. Closing costs on refinances range between 2 and 6 percent of the loan balance, and it can take several years to recoup this money.
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