Am I a Good Candidate for Refinancing?

With interest rates at an all time low, many are wondering if this would be a good time for them to refinance. There are a few basic qualifying questions that you should be able to answer first.

1.) What exactly do I owe on my home? This includes any 2nd mortgages or home equity lines of credit.

2.) What is/are my current interest rate(s).

3.) Do I have any pre payment penalties and what are they? This can be found with your loan documents (typically it is written in your “Promissory NOTE” and details are in the addendum to the note).

4.) What is my current value? This is a little difficult to pinpoint without an appraisal (which will be ordered to determine current value) however, there are several websites such as www.zillow.com that will give you a basic idea.

5.) How long do I plan on staying in the home?

If you owe more that the current value, you will most likely not be a good candidate for refinancing; however you may be able to refinance your first into an FHA loan (where the TLTV “Total Loan to Value” exceeds 100%). Once again, if the first mortgage is higher than current market value this will not be possible without having to bring cash to the table to close.

Many people in ARM’s (Adjustable Rate Mortgages) that are enjoying the current low rates due to being tied to a low index need to remember that in a market when these indexes begin to increase, the 30 year fixed rates will also increase. You don’t want to get caught in a market where you are forced to refinance to less favorable fixed rate loans. Time is of the essence and rates will most likely not get any better than they currently are.


When is it worth refinancing?

The answer to this question will be different for each scenario. It really depends on several factors; how long you plan on staying in the home, what is your primary incentive (lower payment, shorten term of the loan, avoid a fluctuating rate when the current fixed period ARM begins to adjust etc.), and if it is an option for you. Remember that lending guidelines have become stricter than ever and the loan that your originally qualified for may have been in a time when the guidelines where much looser. If you purchased or refinanced your current loan at the height of the market when values where high, you may upside down with no equity and this may prevent you from refinancing.

What are the qualifying requirements?

1.) Minimum credit score of 620 for Conventional and 580 for FHA is the standard. Lenders pull a tri merged credit report from Equifax, TransUnion, and Experian. The highest and lowest scores are dropped and your middle credit score becomes your qualifying credit score. If there are two borrowers such as a husband and a wife then the lower of those two mid scores becomes the qualifying credit score. Payment history must be excellent over the last 24 months with only minor isolated slow payments. Medical and/or minor collections and/or charge offs may not prevent you from qualifying but usually have quite an impact on your credit score. Note: Scores provided for consumer credit reports are not always the same as the lender receives with a tri merged report for the purposes of a mortgage.

2.) Must be able to verify your income with 30 days worth of pay stubs, recent years W-2, and/or 2 years complete tax returns (if self-employed, 1099 contractor or if 25% or more of your income is commission). Over-time, Part-time, and seasonal income may be used if lender can verify that you have received it for 2 years and that it is likely to continue.

3.) Upon determining the appraised value of the property; the new loan can not exceed 97% FHA/ 90% Conv of the appraised value. The amount needed for financing includes the payoff of the existing loan(s), closing costs and pre paid items (tax and insurance escrows).

Below is a list of situations that may prevent you from qualifying for a refinance.

1.) Credit - If you have had more than one or two 30 day late payments on your mortgage in the last 24 months or are currently past due or have a pattern of slow payments on other credit. Also, high balance collections and charge offs may prevent you from refinancing without evidence that they have been settled. Any open judgments or liens that may affect title must be paid. A prior Bankruptcy will require at least 2 yrs (FHA) / 4 yrs (Conv) from discharge date with reestablished credit. There is not much tolerance for derogatory credit after a bankruptcy. A detailed explanation may be required along with a complete copy of the bankruptcy papers.

2.) Income - If you are self employed (less than 2 years) or originally qualified for a “stated income” loan in which your tax returns do not evidence the income that you state you make. Adjusted Net Income (after expenses are deducted) from your most recent 2 years tax returns will be averaged to establish income. If you are self employed in an industry that is suffering and your tax returns indicated a decline in income this may send up a red flag and only recent year income may be averaged to establish income.

3.) Collateral - You owe more that current value.


What do I do if I don’t qualify for a refinance and I can no longer afford the monthly payment?

You can contact your current lender(s) and discuss the possibility of a loan modification. This is where the lender may either reduce your rate or forgive a portion of the amount owed and re amortize your payment to a more manageable one. Keep in mind that they do not want to help you out of the goodness of their heart. There must be evidence that a hardship exists and their incentive is to prevent the possibility of a foreclosure. Most lenders will not even discuss these options unless you are currently delinquent on your mortgage. They will send you a loan modification package requesting income and asset documentation to determine if you qualify. If they do not think that the loan modification will prevent foreclosure, they most likely will not grant it.

If you are not sure where to start and you would like counseling, you can call the toll-free hot line of the Hope Now alliance - an industry group trying to coordinate a response to the mortgage crisis - at 1-888-995-HOPE.

To get pre-qualified Click Here.