Can I Refinance?
Step 1: Home Equity: Property value should exceed the refinance amount
Step 2: Income: Total of refinance payment plus other debts should be < 43% of gross income
Step 3: Credit: Credit score should exceed lender minimums (usually 620-660). Homeowners who don't meet these three guidelines should look for streamline refinance programs, which are more flexible.
There's no doubt about it: Lenders have tightened the guidelines they use to evaluate loan applications. That means borrowers who want to refinance their mortgage to take advantage of low interest rates may wonder whether they will qualify for a new loan. This summary should help you understand what lenders look for when they evaluate mortgage refinance applications:
How much you make and how much you owe
Lenders weigh your monthly income and debt payments through a debt-to-income (DTI) ratio. Conventional wisdom is that lenders look for a DTI that's no more than 38 percent. However, some programs are more flexible and allow a larger DTI ratio.
DTI is a complicated calculation, so you should discuss your income, debts and housing costs with at least a few lenders to determine if you’ll qualify to refinance your mortgage. If you have a high debt-to-income ratio, you may want to concentrate on paying off some of your debts prior to refinancing.
Also keep in mind that most lenders will require that you document your income with recent paycheck stubs, W-2 Forms or federal income tax returns.
How much you want to borrow and how much your home is worth
Another factor that contributes to whether you can qualify for a mortgage refinance is your loan-to value (LTV) ratio. To calculate your loan-to-value ratio, divide the amount you want to borrow by the current value of your home. For example, if your home is worth $250,000 and you want to borrow $210,000, your LTV is 84 percent.
Most lenders look for a loan-to-value ratio of less than 80 percent to refinance. However, again, some loan programs are more flexible.
One example is the new Making Home Affordable program, which allows refinancing with up to 105 percent LTV. This program is open to borrowers who have a good track record of making their mortgage payments and whose loan is owned or backed by Fannie Mae or Freddie Mac.
A second example is the streamlined refinancing program offered by the Federal Housing Administration (FHA), which doesn't require an appraisal. This program is open to borrowers who have an FHA-insured loan.
Have you paid your mortgage bills?
Your credit score also can be an important factor in your ability to qualify to refinance your mortgage. While there is no specific minimum credit score that you'll need to refinance, keep in mind that if your credit is impaired, the interest rate and terms you'll be offered might not make refinancing an attractive option. If you have a strong credit score (and a good track record of paying your bills on time), you'll likely be offered a lower interest rate and better terms.
Remember, lenders will look at a combination of the factors mentioned above —your debt-to-income ratio, loan-to-value ratio, and credit history—along with other aspects of your financial situation to determine whether you’ll qualify to refinance your mortgage. Either way, it is best to speak directly with a lender or multiple lenders to determine your options. You can get no-obligation rates and offers from multiple lenders through LendingTree.
Also keep in mind, if you do qualify to refinance, you should still consider whether refinancing makes sense for you. The free LendingTree refinance calculator can help you figure out how long it will take you to recover your refinance closing costs through a lower monthly mortgage payment.