When people think of refinancing their mortgage it can be both scary and exciting. This is because the initial thoughts of having the ability to pay off current debts and possibly getting a better rate on your mortgage loan are exciting. The thoughts which come after, regarding what it takes to qualify for refinancing, can be scary. People are often confused and poorly informed about what they need to make refinancing a reality. Here is some information to help guide you through the successful refinancing of your home. Let’s Go start Need to Be Met for Refinancing a Mortgage!
Debt to income ratio, or DTI, is one of the key information factors used by lenders in the home loan and refinancing process. This is where the amount of debt you have is weighed against the amount of income you make. This is calculated to determine the size and type of home loan you can realistically afford. Standards have been put into place to keep a lender from putting a person into a loan that would put them at risk of foreclosure.
To calculate your DTI a lender adds up the total mortgage payment and your monthly expenses. They divide this figure by your gross monthly income. The ratio for this calculation should be no higher than 31% to 45%. The variance in the allowed maximum ratio is determined by the type of income you are using to qualify for your loan. Those with fixed incomes are generally allowed to qualify at a higher ratio percentage of DTI than those who have other forms of income.
You can easily track your DTI by calculating it the same way a lender will. Just add up your mortgage plus monthly expenses and divide the sum by the amount of your gross income. It is important to look at this information and not simply rely on the fact you qualified for your original home loan. As time goes on our income can change as well as the monthly financial obligations we have. Knowing your current DTI is part of determining if you can consider refinancing as an option.
Lenders require homeowners to have equity in their homes before they will refinance their current loan. The value of your home has to be higher than the amount of the loan you are trying to obtain. Some lenders require homeowners to have at least 5% equity in their homes. Others can require up to 20% equity. Equity in your home is calculated by having your home appraised. This means an appraiser will come out and look at your home. They will then compare your home with three other homes similar in size to yours which have recently sold in your area. They use this information to calculate your current home value.
The amount you owe on your current home loan is then subtracted from the amount found for the current value of your home. This calculation will determine the percentage of equity you have in your home. This is the amount that determines the amount you can receive in the form of a refinance loan.
You can do some research to determine the possible amount of equity you may have in your home. To do this go online and find websites that list the amounts homes in your area were recently sold for. Find three homes similar to yours, in your area, which have sold in the past 6 to 12 months. Add these amounts and divide them by three. This will give you a good estimate of the current value of your home. Keep in mind you need to find the amounts for homes similar to yours that were actually sold. This is because using the amounts homes are listed for will not give you an accurate calculation.
After you have figured out the estimated value of your home, you will need to contact your current home loan lender. You will then need to obtain the total amount due on your current home loan. Take that figure and subtract it from your estimated home value. The percentage of the amount owed versus the value will help you determine if there is a possibility you qualify for refinancing at this time.
Liens on your property can possibly stop you from receiving home refinancing. If lenders find you have liens against your property they generally require these to be paid off prior to a loan being approved. This is because a property that has liens against it cannot be sold. If your home went into foreclosure the bank could not sell it until the lien was paid. To avoid this, most lenders will require all liens to be removed or satisfied prior to qualifying you for a loan.
If you have liens against your property, there are a few ways you can go about having them removed. The first thing you will want to do is contact the lien holder. Try to see if you can negotiate a settlement amount to pay off the lien. If the lien on your property is with the IRS, then there is the possibility of having the lien removed, if you negotiate a payment arrangement with them.
One factor which is often overlooked by borrowers prior to applying for a refinance loan is their credit score. Having a low credit score can cause you to be blocked from money saving low interest and fixed-rate loans. It could even prevent you from being even qualified for a loan. It is wise to obtain your credit score from all three major credit reporting agencies. Once you have obtained these scores add them together and divide the sum by three.
This will give you the score that a lender will use in the loan qualification process. An average credit score of 620 or higher can qualify you for lower interest rate and fixed rate A-paper loans. Scores under 620 fall in the sub-prime category of higher interest rates and adjustable interest rates. Scores too low may be denied for both of these types of loans.