Find out the requirements to get approved for a mortgage or refinance.
With interest rates at historic lows, you may have wondered whether you should pull the trigger on buying a home, buying an investment property, or refinancing a mortgage. Even though interest rates and home values are low, lending standards are higher than ever. In this article we’ll explore what it takes to qualify for a conventional mortgage in the current credit environment.
How to Qualify for a Mortgage or Refinance
Before you apply for a new mortgage or a refinance, you need to make sure that you’re in good financial shape. If you don’t have the financial chops to qualify or have more debt than is allowed for a refinance, for instance, going through the application process will be a waste of time. It’s possible that you could be approved for a loan, but at an outrageously high interest rate.
Each lending institution has different underwriting guidelines for evaluating a potential borrower; and I’m sure you know that due to the credit crisis, lending standards are now tougher than ever. When you apply for a home loan, you’re generally judged on the following five categories:
Income: Do you earn enough to make mortgage payments and is it likely that this income will continue in the future?
Credit score: How likely are you to make on-time mortgage payments based on your credit history?
Debt: Will you have enough cash flow left over to make a mortgage payment after paying your other liabilities?
Savings: Do you have enough for a down payment plus more cash on hand to pay your mortgage if your income is reduced?
Financial ratios: How much debt do you have relative your income?
In addition to those five qualification categories, you need to have at least 20% equity to refinance a primary residence. Equity is the difference between how much a property is worth and the amount that you owe on it. It’s based on your home’s current appraised market value, not what you paid for it. So if your property is worth $250,000 today and you still owe $225,000, you have equity of $25,000 which comes to 10%. In most cases, that wouldn’t be enough equity to qualify for a refinance because, as I mentioned, 20% is usually the magic number. Some lenders may even require you to have more than 20% equity to refinance an investment property.