The plunging interest rates have prompted many homeowners to refinance mortgages. An online survey by Harris Poll found that 17% of U.S. homeowners with a mortgage on their primary properties had refinanced towards the end of 2020. The survey also showed 31% of homeowners with loans on primary residences were planning to refinance within the next 12 months. Not all homeowners are eligible for refinancing; they need to meet specific criteria to qualify. According to research qualifying borrowers can get refinancing as high as 125% of their home’s value. So what requirements do homeowners need to meet to qualify for refinancing?
What is Refinancing a Home Loan?
It is the process of applying for a new loan from another or existing lender to pay off the original loan. Homeowners refinance loans to take advantage of a low-interest rate as is the case with the current U.S. mortgage market, reduce monthly repayments, or the loan-term. Another reason homeowners refinance is to move from floating rate loans to fixed loans. High floating rates translate into high monthly repayment costs, and moving to fixed-rate loans can reduce the expense significantly.
While the requirements vary by loan type and lender, there are a few similar things:
Have Owned the House For a Long Time
Lenders want to know how long you’ve owned the house. The rule of thumb states your name must be on the property title for a minimum of six months. This rule applies to borrowers who have applied for the traditional mortgage, V.A. (Veterans Affairs), or jumbo loans and want to apply for a cash-out refinance. However, if the borrower wants to refinance an FHA (Federal Housing Administration) loan, they may need to wait longer, sometimes up to a year.
Decent Credit Score
Credit scores have a direct impact on a homeowner’s ability to refinance mortgages. Lenders use the score to determine if you’re eligible for another loan and the interest rate to charge. For conventional loans, a credit score of 620 and above is befitting. If refinancing an FHA loan, you need a minimum credit score of 580.
Your Income Amount
If your income has changed since you applied for the current loan, you’d need to prove that you can repay the new loan. This means analyzing the new monthly payments and determining if your income covers them. Lenders use the debt-to-income ratio to calculate the amount of income available to repay mortgages.
The ratio is expressed as a percentage and calculated by dividing the total monthly debt by your gross income. As such, if your monthly debt comprises student loans, car loans, credit card debt, and any other recurring debt, they’re all added to determine the total monthly debt. Generally, lenders prefer a debt-to-income ratio of 50% or lower; a higher ratio disqualifies you from refinancing.
Enough Home Equity
Home equity is the percentage of the property the borrower owns. It’s also referred to as the loan to value ratio and is an essential metric that lenders use to determine one’s eligibility for refinancing, the new loan terms, and annual percentage rate. The general rule of thumb states the homeowner should own at least 20% of the equity in a home if they want to refinance.
Borrowers who have a loan-to-value ratio less than 20% but have a good credit rating are still eligible, but the lender charges a higher interest rate. Alternatively, you may be required to take out mortgage insurance.
Are There Other Ways of Refinancing a Home Mortgages?
If the selection criterion disqualifies the homeowner from refinancing the loan, they can explore other options like
- Looking for a cosigner: A cosigner agrees to repay the loan if the borrower defaults. Asking a cosigner to sign the loan with you increases your odds of loan approval
- Find out about government loan programs: Organizations like the Federal Housing Administration, the U.S. Department of Veteran Affairs, and the U.S. The Department of Agriculture offers refinancing programs
Refinancing your mortgages are an excellent way of reducing your loan term, taking advantage of lower interest rates, among other benefits. With these points, you can quickly determine if you’re an eligible candidate.