Is Refinancing an Option for You?

Santa can deliver many gifts, but a mortgage refinance may not be one of them. If you’re ready to overhaul your mortgage, the first step is to determine whether you’ll qualify.

A quick call to a trustworthy mortgage broker is the best way to find out if you qualify for a mortgage refinance—but it’s not the fastest way. Generally, your broker won’t make any promises until you’ve completed the refinance application. If you’re not ready to make that commitment just yet, use the following framework to determine if refinancing is even an option.

Credit score

To get the lowest mortgage refinance rates, you need a credit score that’s in the mid-to-high 700s. If your score is between 660 and 720, you can still refinance, but at a higher interest rate. Below 660, your options become more limited. The minimum score for an FHA loan is 620. Certain specialty lenders may go lower, but it will depend on your other qualifications.

For a fee, you can check your credit score at MyFico.com.

Home equity value

Refinance lenders want you to have a nice chunk of home equity, to protect you and them against declining home values. As a general guideline, the loan amount shouldn’t be more than 80 percent of the home’s market value. This equates to a 20 percent home equity cushion. If 80 percent of your home’s value is enough to pay off your existing mortgage, then you’re in good shape. If it isn’t, consult with a lender or broker to determine your options.

Income and expenses

Lenders will evaluate your income and expenses to determine if you can afford the new loan payment. Here’s how to simulate this calculation:

• Add up your minimum required monthly debt payments, including child support
• Calculate the new mortgage payment, plus taxes and insurance
• Add the calculated housing expenses to your monthly debt payment total
• Divide the sum into your gross monthly income

The result is your debt-to-income ratio (DTI). Lenders vary on maximum DTI thresholds, but most prefer to see a number below 36 percent.

Employment

A strong employment history in a stable industry looks great on a refinance application. If you have hopped around jobs, or work in an industry that has struggled recently -- like housing construction -- lenders will be more nervous. Discuss your concerns in this area with your broker, as each lender has different thresholds.

Second mortgage

Your second mortgage lender has the right to block a first mortgage refinance. You can get around this problem, however, by paying off both mortgages with the refinance proceeds. If this isn’t possible, contact your second mortgage lender and ask for advice. The lender may allow the refinance, or may offer to do the refinance for you.

The qualification requirements for mortgage refinancing protect you as much as they protect the lender. The gift of a mortgage refinance may be just what you need to start the New Year off right -- but only if you can truly afford it.