You want to refinance your mortgage loan. You know that you can save potentially hundreds of dollars a month depending upon how far your mortgage interest rate falls following your refinance. Lenders rely on different guidelines when determining who qualifies for a refinance. But there are some requirements you'll have to meet, no matter which lender you work with.
Credit scores have become increasingly important for homeowners looking to refinance. These three-digit scores tell lenders how well you've managed your finances in the past. If you've missed several car payments, run up large amounts of credit-card debt and declared bankruptcy in the last seven to 10 years, the odds are that you'll have a low credit score. In general, mortgage lenders award their lowest interest rates to borrowers who have credit scores of 740 or higher on the FICO credit-scoring scale. This is important for borrowers seeking to refinance; the lower the interest rate for which you qualify, the bigger your monthly savings will be when you refinance. Most conventional mortgage lenders won't provide you with a mortgage loan if your score is under 620. You can, however, qualify for a mortgage loan insured by the Federal Housing Administration -- commonly known as an FHA loan -- with credit scores as low as 500.
Lenders also want to work with borrowers whose monthly debts do not consume too much of their gross monthly income, their income before taxes are removed. In general, lenders look for borrowers whose estimated new monthly mortgage payments -- including principal, taxes and interest -- equals no more than 28 percent of their gross monthly income. Lenders also prefer working with borrowers whose total monthly debts -- a figure that includes mortgage payments but also auto-loan payments, student-loan payments, minimum required credit-card payments and other recurring monthly expenses -- equal no more than 36 percent of their gross monthly income.
To qualify for a refinance from a conventional mortgage lender, you'll need to have at least 20 percent equity in your home. Equity is the difference between what your home is worth and how much you owe on your mortgage loan. If your home is worth $150,000 and you owe $100,000 on your mortgage loan, you have $50,000 worth of equity in your home. To determine if you have equity of at least 20 percent, your lender will send an appraiser to determine the current market value of your home. If your home has lost value since you purchased it, you might not have enough equity to qualify for a refinance.
Your lender will also verify your employment. Lenders prefer working with borrowers who have held a position in the same field and with the same company for at least two years. This rule isn't set in stone, though. If you are self-employed, for example, you can ease your lenders' concerns by providing tax returns that show you've had a steady income stream for the last two to three years.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.