For those homeowners who may be interested in refinancing, you may or may not be ready to jump in.
Lenders have developed stricter criteria in the wake of the recession. Here are some of the metrics you'll need to meet in order to be an attractive candidate for a refinancing opportunity.
#1: Are You a 20 Percent Stakeholder?
The lenders would ideally like to see that you've got skin in the game — meaning, they want you to own at least 20 percent of the equity in the house.
How do you know whether or not you have that level of equity? Divide the principal amount that you're trying to borrow by the value of your house. If your home is valued at $350,000 and you want to borrow $250,000, you have a "loan-to-value," or LTV, of 0.71, or 71 percent. That means you have a 29 percent equity position, with the lender providing the other 71 percent.
How can you find out the current value of your home? Your lender will most likely order an appraisal. But before that happens, you can estimate the value by looking at recent sales of comparable homes in your neighborhood.
(However, if your mortgage is backed by [entity display="Fannie Mae" type="organization" subtype="company" active="true" key="fannie-mae" natural_id="fred/company/1542"]Fannie Mae[/entity] or [entity display="Freddie Mac" type="organization" subtype="company" active="true" key="freddie-mac" natural_id="fred/company/1677"]Freddie Mac[/entity], or your mortgage is FHA-insured, you may be able to qualify for federal programs that help you refinance, even if you have less than 20 percent equity. The Home Affordable Refinance Program, for example, helps underwater homeowners refinance, and the program is expected to continue through December 2015.)
#2: How High Is Your Credit Score?
Most lenders require a minimum credit score of 600 to 650 in order to approve refinancing applicants; some lenders (such as a select credit unions or local banks) demand a credit score of 720 or above.
Your credit score is based on five factors:
- Payment History (35%) – Do you make on-time payments?
- Utilization Ratio (30%) – How much are you borrowing, relative to your total credit limit?
- Length of Credit History (15%) – How long have you been using credit?
- New Credit (10%) – Have you recently applied for any new lines of credit?
- Types of Credit in Use (10%) – Do you mostly have installment loans (mortgages, student loans) or revolving loans (credit cards)?
Each of the three major credit-rating agencies, [entity display="Experian" type="organization" subtype="company" active="true" key="experian" natural_id="fred/company/1525"]Experian[/entity], [entity display="Equifax" type="organization" subtype="company" active="true" key="equifax" ticker="EFX" exchange="NYSE" natural_id="fred/company/1484"]Equifax[/entity] and Transunion, allow you to view your credit score once per year for free. Make a habit of checking your score once every four months, revolving among these three agencies.
#3: How Much Other Debt Do You Carry?
Lenders look at the monthly payments on all of your debts (including your mortgage, student loans, credit card balances, and car loans) relative to your income. They divide the two figures to craft your debt-to-income ratio, and they typically want that ratio to be no more than 38 percent.
In other words, they want you to spend no more than 38 percent of your take-home pay on debt repayments.
Generally, underwriters want to see the mortgage component of your debts stay within 28 to 30 percent of your total take-home pay. If you take-home $4,000 per month, for example, you should spend no more than $1,120 to $1,200 per month on your mortgage payments. This includes mandatory housing-related fees, like your homeowners association dues.
Meanwhile, the remainder of your debts (such as student loans) shouldn't push your total above roughly 38 percent.
Each lender has different requirements, so don't panic if your DTI is 39 percent. (And conversely, don't assume you're in the clear if you're at 37 percent.) Some lenders, for example, allow your DTI to be as high as 45 percent, and the mortgage component of this to be as much as 33 percent. Other lenders, however, have more stringent criteria.
The Bottom Line
Qualifying to refinance your home goes hand-in-hand with maintaining general strong financial health: Keep your debts low, your credit score high, and build equity. That's good advice regardless of whether or not you're aiming to refinance.
This article Do You Qualify for Refinancing? originally appeared on Trulia Tips.
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