So you did major number crunching and found out that you might just qualify for a mortgage refinancing. But, there really is no reason to celebrate until you get approved by a lender.
So how do you really know if it's the best move for you? Here are the important things you need to know about mortgage refinancing before you take the plunge according to Trulia:
Are you a 20% stakeholder?
Yes, you need to own at least 20% of the equity of the house before the lender can tag you qualified for refinancing. For instance, divide the amount that you need to borrow ($250,000) by your house's value (($350,000). This gives you a "loan-to-value" ratio of 0.71 or 71% which puts you at 29% equity position.
The lender would also have your house appraised, but you can already have an idea of the current value of your home by checking recent sales of comparable properties in your neighborhood.
How high is you credit score?
To even get considered, you need to meet the minimum credit score of 600 to 650 - some, even up to 720 or above - by most lenders. These are the following factors that affect your credit score:
Payment history (35%): Do you make your payments on-time?
Utilization ratio (30%): How much are you borrowing in relation to your total credit limit?
Length of credit history (15%): How long have you been a credit user?
New credit (10%): Did you recently apply for any new line of credit?
Types of credit in use (10%): Do you mostly have installment loans (mortgages, student loans) or revolving loans (credit cards)?
How much other debt do you carry?
Lenders put great consideration to your debt-to-income (DTI) ratio and they would like to see it no more than 38%. This is gauged by the monthly payments on your mortgage, student loans, credit card balances, car loans, etc. in relation to your income.
They usually want your debt's mortgage component to be within 28% to 30% of your total take-home pay. The remainder of your debts also should not push your total above 38%.
Lenders vary in their requirements and the values can change depending on a particular lender's criteria.
