From time to time, mortgage rates drop and reach record lows. The COVID-19 pandemic is an example of an event that resulted in a significant drop in interest rates. Whenever this happens, people often start thinking about refinancing their mortgages. If you’re considering this option, now might be the right time to get started. Before you rush into it, though, you should learn more about refinance requirements.

Knowing the requirements before you apply can help you learn whether you qualify for a refinance loan or not.

Here are the top seven requirements to understand before you apply.

1. Refinance Requirements: Have a Valid Reason or Tangible Benefit.

Many of our customers find a benefit to refinancing. This includes a lower mortgage payment, taking cash out, reducing the interest payments on the loan or paying of the house early.

To Obtain a Lower Interest Rate

What is the interest rate on your mortgage? If it is higher than the current rates available, refinancing is the only way to take advantage of the lower rates.

When you refinance, you get a new loan with a new interest rate. A lower rate will result in having lower mortgage payments and will help you pay less money in interest.

If you want lower mortgage payments and can get a lower interest rate through refinancing, then you should consider going through with it.

To Switch to a Fixed-Rate Mortgage

The second reason people consider refinancing is to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan. ARMS are unpredictable, and that is the one feature people dislike about them.

With a fixed-rate, you will never have to worry about your rate increasing. You will have a steady mortgage payment amount for the life of your loan.

To Take Cash Out

Refinancing as a way to take cash out of your home is also a valid reason. You can do this if you have equity in your home and if you have a good reason for needing the money.

To Eliminate Private Mortgage Insurance

You can also eliminate private mortgage insurance (PMI) by refinancing if you have enough equity in your home. If you’re tired of paying PMI and feel that your house is now worth enough, refinancing is the ideal way to stop your PMI requirement.

If you have a reason other than these, talk to a lender to find out if it is a legitimate reason to refinance.

2. Meet the Financial and Credit Requirements

When refinancing, you must also meet financial and credit requirements. To do this, you must prove you can repay the loan. You must also prove that you are creditworthy enough for the lender to approve your loan application.

Here are some details to know about each category:

Financial Requirements

One part of the application process is completing a financial statement. This statement asks you to list all your assets with their values. It also asks for a list of your debts. The difference between these amounts represents your net worth.

Lenders consider a person’s net worth when approving loans. If you have a negative net worth, you might not qualify for a loan.

Lenders also calculate ratios when evaluating a person’s finances. One popular ratio is the debt-to-income (DTI) ratio.

The answer to this ratio reveals how much debt you must pay compared to the income you earn. If your DTI is too high, you will not qualify for a mortgage loan.

Lenders also evaluate a lot of other details related to an applicant’s finances, including their income and debts.

Credit Requirements

Lenders also have credit score requirements for loan approvals. You might want to know what credit score is needed to refinance, but there is not just one universal answer to this.

The credit score you need depends on the loan program you plan to use. If you use an FHA loan for the refinance, you would need a lower score than if you used a conventional loan.

It’s also wise to look at your credit score before applying, so you have an idea of where you stand. You’ll likely need a score of at least 600 to qualify for most loan types.


3. Provide the Necessary Documentation

You’ll also discover during the refinancing process that you must supply the lender with the necessary documentation. The documentation needed for a mortgage typically includes the following items:

  • Pay stubs
  • W-2s or tax returns
  • Current financial statement
  • Balance statement from your current mortgage company

Your lender will supply you with a list of the documents you must provide with your application. Additionally, the lender will ask you to sign documents that allow them to verify your job, income, and credit.

You need the same documents to apply for a refinancing loan as you do when applying for a loan to buy a house.



4. Meet the Timing Requirements

Another requirement you should know about is timing. You cannot instantly refinance a home loan after getting it. You must generally wait at least six months from the date you took your original loan.

If you’re wondering how long do you have to wait to refinance, the answer is generally at least six months. Some loan programs may have longer timing measures in place.

5. Prove You Have Enough Equity Through an Appraisal

Most lenders have requirements in place that relate to the value and equity of a home. Lenders set these guidelines to avoid issuing loans for amounts that are higher than the values of the homes.

To find out how much equity you have in your house, subtract your mortgage balance from the home’s current value. If you owe as much as the house is worth, you have no equity in the property. Getting a loan, in this case, would not be easy.

Lenders place a lot of value on equity amounts when approving all types of mortgage loans, including new home purchases. If you feel you have enough equity, you can apply now for a refinancing loan.

One thing to note is that your lender will need to order an appraisal before approving your request to refinance. A current appraisal is always a requirement for any loan you get for a loan.

The appraisal will determine precisely how much your house is worth, and this will help the lender see the exact amount of equity you have in your home.

Depending on the loan program you use, you may need at least 10% to 20% equity in your house to go through with the refinance. There are programs, too, that may require lower percentages.

6. Pay the Fees

Refinancing a loan is not free. You will have to pay fees for this event, and the fee amounts vary. Here is a breakdown of some of the fees you may incur from the process of refinancing:

  • Loan origination fee
  • Appraisal fee
  • Title and escrow fees
  • Credit check fees

You should aim to pay these fees out of pocket when refinancing. If you cannot, you would have to roll them into your loan, which would leave you with a higher loan balance than you had before.

Lenders often offer lender credits to help offset the costs. It is important to work with a mortgage broker or wholesale lender like Choice Home Mortgage and will will shop the top lenders to find the best possible deal to match your unique situation. 



7. Plan to Stay There Long Enough to Make It Worthwhile

Finally, you should consider one last thing before refinancing – how long you plan to stay in this house. Because you must pay fees to refinance your loan, you should make sure you live in the house long enough to recoup these costs.

To determine the answer to this, you can use a simple calculation:

  1. Add up the closing costs you must pay to refinance
  2. Determine the amount you will save per month on your new house payment
  3. Divide your total closing costs by the amount you save each month

The answer you get reveals the number of months it will take for you to recoup the closing costs you paid to refinance. If the answer is 30, it means it will take 30 months to recoup the costs.

In this case, if you are planning on selling your house in one year, refinancing would not be worthwhile. If you plan on selling in three years, refinancing would be advantageous.

Take Advantage of Low Rates by Applying for a Refinance Loan

If you have a legitimate reason to refinance, and if you believe that you meet the refinance requirements, contact us.

We offer all kinds of mortgage loans and can help you find the right option for your situation. Visit our site for more information about our services, products, and interest rates, or give us a call to learn more.

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