Refinancing — taking out a new mortgage at a lower interest rate — cuts your monthly mortgage payments and the overall cost of your loan. Just like the original mortgage, you have to convince your lender you're a good risk before you get the loan. If your finances aren't in great shape, you may not qualify.
Lenders want you to have at least 20 percent equity — the value of the home above the mortgage debt — in your home after you refinance. Some lenders will go as low as 5 percent equity if you take out mortgage insurance, but if your home's value has dropped below your current mortgage debt, it won't be much help. The federal government may help refinance an underwater home, provided your debt is no more than 125 percent of your home value.
When a married couple divorces, the spouse keeping the house may apply for a new mortgage so that her ex isn't liable for any of the debt. If you and your spouse are splitting up, that doesn't automatically disqualify you from refinancing. If, however, you're still feuding over who keeps the property, nobody's going to help you refinance until that gets sorted out. If you took out the original loan with two incomes, your lender may also worry that one income isn't enough to keep the payments current.
Your lender will want proof your income is enough for the payments on your refinance. To prove that, you'll have to document your income with recent tax returns, paycheck stubs and bank statements. Even if your current income is good, your lender wants to know it's stable. If you've just started a new career — switching employers in the same field isn't so bad — that might be grounds for writing you off. You're usually better off refinancing first, job hunting later.
Credit and Debt
When going over your finances, your lender is just as interested in your debts as your salary. The key is your debt-to-income ratio, the percentage of your monthly income that goes to credit cards, student loans, car payments and housing payments. If the ratio is higher than 38 percent, many lenders will disqualify you. And of course, your credit rating plays a factor: If your credit is poor, with a history of missed payments, your lender may not offer a low enough interest rate to make refinancing worthwhile.
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