Can I Qualify for a Refinance?
Wondering if you can qualify for a refinance can make you hesitant to submit your application. Mortgage refinances do involve getting an approval from a home loan lender, and any changes in your credit score and yearly income can affect loan approvals. Instead of wondering if you can qualify for a refinance, educate yourself on what lenders require and then apply when you're ready.
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Credit Requirements for a Refinance
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According to Bankrate.com, qualifying for a refinance will require a credit score of at least 680. There are advantages to a higher credit score, such as a lower interest rate on the mortgage loan, which subsequently reduces the mortgage loan payment. Borrowers achieve higher credit ratings with good credit habits such as paying credit card balances and other bills on time and eliminating outstanding debt.
Home Appraisal
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Even with a good credit rating, lenders may turn down an application to refinance if a borrower doesn't have enough equity in their home. An 80 percent loan-to-value, or at least 20 percent equity, is a refinance requirement. Lenders calculate home equity by dividing what's owed on the current mortgage by the appraised value of the property. Loan programs to help borrowers with little-to-no equity include FHA mortgage loans and the Making Home Affordable Refinance program. Lenders can provide information on eligibility.
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Affordability
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Refinancing to get a lower mortgage payment after being laid off or experiencing a decrease in income can prove challenging. Because mortgage lenders re-assess a borrower's annual income and ask for information regarding their most recent paycheck stubs and W-2 statements, a drop in income or unemployment can prevent refinancing. Other documentations needed to determine eligibility for a mortgage refinance include complete tax returns from the past two years and banking statements.
Closing Costs
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Each applicant applying for a mortgage refinance needs to determine how to pay the closing costs, which are fees paid to a lender or broker for preparing and servicing the loan. Fees also pay for services provided by third-party companies such as the title company. Typical fees on a refinance are between 3 and 6 percent of the loan balance. Qualifying for a refinance involves meeting this expense by either paying the money out-of-pocket on the day of closing, or asking the lender to increase your loan balance and rolling the fees into the mortgage.
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