If you’re thinking about refinancing your mortgage, you must determine if you qualify. Just because you already have a home doesn’t automatically qualify you.
You must prove you can afford the new loan, have a good history on your current loan, and benefit from the refinance (or at least make sure it makes sense).
Just like when you bought your home, the better your qualifying factors are when you apply, the higher your chances of approval.
You don’t need perfect credit, but the higher your credit score is, the better your chances of securing the ‘best mortgage.’
Credit scores over 700 get the best rates and terms, but any score over 660 usually has access to great programs. Before you apply for a refinance, pull your credit and make sure your credit history is in good standing. If you have any late payments, collections, or overextended credit, take care of them before applying to boost your credit score and get the best options.
Credit scores change every 30 days, so you can improve your situation before applying.
Good Mortgage Payment History
Lenders look first at your credit score and second at your mortgage payment history when you try to refinance. They want to know you make your payments on time. If you don’t, they likely won’t take a chance lending to you.
If you’ve paid your mortgage late (over 30 days late) in the last 12 months, it’s best to wait until an entire year has passed since the last late payment. You’ll have more options and get the best interest rates.
Low Debt-to-Income Ratios
Just like when you bought your home, lenders compare your gross monthly income to your existing debts. If you’ve built up more debt since you bought the home, you may have a higher DTI.
Calculate your total monthly debts and compare them to your gross monthly income (income before taxes). If it’s higher than 43%, try paying some debts down or off before applying for a new mortgage. The lower your DTI, the higher your chances of approval.
Some mortgage programs require you to own your home and the current loan for a specified period before you can refinance.
For example, if you want to tap into your home’s equity, most lenders require you to wait 180 days after your home purchase or last refinance. Not all loans have a seasoning period, it depends on the reason and the loan program.
Before you refinance, evaluate your financial situation. Do you have good credit and a low debt ratio? Is your mortgage payment history timely for at least the last year? Do you have enough equity if you’re trying to cash into it?
Boosting your credit score, paying off debts, and perfecting your mortgage payment history will leave you with the lowest interest rates, best terms, and the most options when refinancing your mortgage. If you’re in over your head, though, talk to your lender about refinancing options for homeowners in trouble. Many lenders have programs to help you avoid foreclosure too.