Refinancing Your Mortgage – How to Qualify

The rules of the road have changed in the last year when it comes to refinancing your mortgage. Financial institutions have become more restrictive in writing loans. While it’s still a great time to borrow money, with exceptionally low interest rates, your credit score will be more closely evaluated, as well as your current home value and equity accrued. Some things to keep in mind:

How Much Do You Earn? How Big Are Your Monthly Bills?

Debt-to-Income Ratio (DTI Ratio) A Reality Check on Your Credit “Worthiness”
Banks will look at a ratio of your monthly income compared to your monthly expenses and overall debt. The common calculation used is a debt-to-income ratio, or DTI ratio.

Monthly Income

Monthly Payments or Debt
  • Monthly Salary
  • Guaranteed bonuses or commission
  • Dividends or other investment income
  • Business income
  • Mortgage payment (principal, interest, insurance, including PMI, and property taxes)
  • Car payment (loan or lease)
  • Credit card payments (minimum payment)
  • Repayment of student loans
  • Child support obligations
  • Other – utilities, phone, food, gas, etc.

TOTAL Monthly Income

TOTAL Monthly Debt

The DTI is then calculated by dividing your total monthly income by your total monthly debt. For instance, if your monthly income is $8000 per month, and your monthly debt is $6000 per month, your DTI is calculated as $6000/$8000 = 75%. A lower DTI is more desirable when assessing your financial picture. Typically lenders want to see a DTI of 38% or lower and will want to see proof of income, in the form of W-2 Forms, paycheck stubs and federal tax returns.

What Is Your House Worth? Do You Have “Skin in the Game”?

Loan-To-Value Ratio (LTV) – Another Important Ratio
Home values have been on a wild ride in the last several years and today’s valuations, while stabilizing, look dramatically different from just a few years ago. A lender will assess your home’s current value, and compare that value to the amount you want to borrow. Lenders use the LTV ratio to compare your home’s current value and your equity position in the home. If your home has a current appraised value of $200,000 and you want to borrow $150,000, the LTV is calculated as $150,000/$200,000, or 75%. Many lenders set a maximum threshold of 80% when approving a home refinance. Another way to look at this is lenders want to see that you have at least 20% equity or “skin in the game” in your home.

Are You Bills Paid On Time?

Your credit score can impact your ability to get a loan, and also the rate you will pay for a loan. Your credit score is a reflection of credit that has been extended to you in the form of credit cards, loans, and other financial obligations, and your timeliness in paying bills on time. It is typically reported as a calculated FICO score, and ranges from 300 to 850, with a higher number representing a better credit rating. AnnualCreditReport.com is a free service that allows consumers to get a snapshot of their credit profile currently being reported to credit agencies. This free report, allows you to review your current financial picture being reported by the credit bureaus, and gives you the opportunity to correct errors, or dispute reporting that you think is not accurate.

Making Sense of the Numbers

As you can see, lenders look at your overall financial profile in determining your ability to get a loan, how much you can borrow, and how much you will pay. The most important considerations are:

  • Your monthly income, compared to your monthly bills and debt (DTI Ratio)
  • Your home’s current value, compared to how much you want to borrow (LTV Ratio)
  • Your FICO score, which reflects your credit and repayment profile.