As we are all well aware by now, mortgage lending standards were lax during the housing boom. Now, many of the people who bought back then with little down payment and not-so-great credit and who have since lost their jobs or had to take a pay cut due to the financial crisis are behind on their payments or have had to foreclose on their homes. In response, mortgage lending standards have made a 180 degree turn. So, if you do not have stellar credit, a stable job, or the home equity required to refinance in today’s housing market, you probably won’t qualify.
The main obstacle you face is answering the question: Are you eligible to refinance? And, the answer unfortunately is not simple because the process used to determine your eligibility for refinancing is similar to the approval process used when you obtained your original mortgage. Your lender is going to consider your income, assets, debits, credit score, current value of your property and the amount you want to borrow. So, for example, if your credit score has improved, you may be able to get a loan at a lower rate. But, if your credit score has weakened, you could end up having to pay a higher interest rate and, in that case, won’t want to refinance.
Additionally, a lender will look at the amount of the loan you are requesting and the value of your home, as determined by an appraisal. The result of this evaluation is called LTV or loan-to-value ratio. If the LTV ratio does not fall within your lender’s guidelines (each lender has different guidelines, so it pays to shop around), you may again be offered a loan with less favorable terms than you already have.
Lenders want to know if you earn enough money to repay the loan. Housing costs should be 28% or less of your gross (pretax) income. Count all recurring expenses including principal and interest on your mortgage, property taxes, condo or association fees and insurance. If you are a two-income family, you can consider income from both jobs. You can also consider money made from part-time and seasonal work.
Lenders want to know if you earn enough money to repay the loan. Housing costs should be 28% or less of your gross (pretax) income. Count all recurring expenses including principal and interest on your mortgage, property taxes, condo or association fees and insurance. If you are a two-income family, you can consider income from both jobs. You can also consider money made from part-time and seasonal work.
Currently about 38% of homeowners with a mortgage spend more than 30% of their income on housing. About 15% spend half of their income or more on housing. Many of them can’t make their payments, are defaulting on their loans or are already in foreclosure. Don’t become one of them.
Total monthly debt payments should be 36% or less of your income. Add up all your expenses: auto loans, student loans, credit card bills, child support, etc against your 401(k) plan. The more non-mortgage debt you have, the less you can afford to spend on a home.
Total monthly debt payments should be 36% or less of your income. Add up all your expenses: auto loans, student loans, credit card bills, child support, etc against your 401(k) plan. The more non-mortgage debt you have, the less you can afford to spend on a home.
The housing bust dropped home values and depleted home equity for at least 25% of the American homeowner population. Even if you have good credit and a solid job, you may be rejected when you try to refinance because your home is worth less than what you owe on your mortgage. If your loan has negative amortization, (when your monthly payment is less than the interest you owe, that unpaid interest is added to the amount you owe) it will difficult to refinance. If this is the case, you may actually owe more on your mortgage than what you originally borrowed.
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