Improve Your Chances of Qualifying for Refinance
A mortgage refinance loan opens the door to a world of opportunities. A refinance involves submitting a new home loan application with the hopes of replacing your original loan. The purpose of a refinance varies, and each person has their own objective in mind. One family might refinance their home loan to lower their interest rate, whereas another family applies for a refinance to cash out their equity. Regardless of the reason for obtaining a mortgage refinance loan, getting this type of loan requires meeting a lender's guidelines.
Step 1
A low credit score or recent credit issues can stop a refinance loan application. Lenders are particular and getting approved for a mortgage refinance loan requires a good credit score. This is defined as no late payments and no recent judgments, bankruptcies, or foreclosures. Lenders check every applicant's credit report. It's wise to clean up credit reports before applying for a mortgage refinance loan. This ensures a quick and simple approval. Failing to fix credit issues will delay the refinance process. Removing errors on credit reports, paying down debts, as well as improving payment records helps boost credit scores. A good credit score when refinancing a mortgage loan is 680 or higher.
Step 2
Applying for a mortgage refinance loan with less than 20 percent equity in the property can also stop the loan process. Some properties will not qualify for a new loan. As a rule, lenders prefer homes with at least 20 percent equity. This is because the majority of lenders only lend 80 percent of the property's value. A home appraiser determines the value of properties. Borrowers with values below the 20 percent threshold can still refinance their homes. However, they'll need to apply for FHA financing. This type of mortgage refinance loan only requires three percent equity.
Step 3
Increasing consumer debts is another factor that might delay a refinance. High credit card balances, expensive auto loan payments, and high student loan debt will impact a lender's decision. Lowering debt-to-income ratios not only increases purchasing power, but it also helps a borrower keep his total monthly debt percentage under 36 percent. This is a criteria for most mortgage refinance loans. Paying more than the minimum on credit card accounts, using credit cards only for emergencies, and paying off new charges each month is a responsible way to manage debt and maintain a low debt ratio.
Step 4
Closing costs are an undesirable aspect of applying for a mortgage refinance loan. Borrowers can't escape these fees, but they can negotiate a reduced price. Lenders base closing costs on fees to pull credit reports, originate the loan, and other third-party expenses. Once a borrower receives his Good Faith Estimate, which breaks down estimated closing costs, he can contact his lender to negotiate or talk down some of the fees. This method is likely to work when a borrower refinances with his existing home loan company. Nonetheless, it doesn't hurt for borrowers to acquire multiple loan quotes from other banks. Comparison shopping can help borrowers find a loan with cheaper costs and better terms.
