Refinancing is the process of obtaining a new mortgage to reduce mortgage payments, lower your loan term, and/or cash out some equity from your home. Lenders look at various factors before refinancing your mortgage. Rates are now at or near the lowest they have ever been – so it is a great time to refinance. Getting to know the minimum requirements for qualifying for a refinance is will help you increase your chance of getting the best rates available.
Credit Score
The FICO’s accredited score determines if you are eligible for refinancing, and if you do, the interest rates you get. The Fair Isaac Corporation created the FICO credit score based on your payment history, the current level of indebtedness, type of credit used, length of credit history, and new credit accounts. The credit scores vary inversely to the interest rates; thereby, a high credit score gives you a low-interest rate offer.
According to FICO, you need to have a credit score of 620 to qualify for refinancing. Having a credit score greater than 760 gives you very good interest rates. A score of 620 will give you a rate of 5.022%, whereas 760 gives you a rate of as low as 3.433%. Having a high credit score is the first step to qualify for refinancing. You can qualify for refinancing with a score of 500, requiring an instant payment of 10%, but it’s theoretical. Be sure to check on your credit scores regularly.
Income Stability
Lenders prefer customers with a steady income of money. Employment for at least recent two years would be essential for you to qualify for the mortgage. Unemployment and declining earnings will not be good for your qualification. The lenders will verify your income and tax payments for two years. Lenders are up straight and strict when it comes to verifying income and other aspects of your application.
Debt To Income Ratio
DTI is the abbreviation for debt to income ratio. Two types of DTI’s essential for your qualification. The back-end ratio is the ratio of the sum of all your monthly income debt and your planned new house payment to your average monthly income. The other is the front-end ratio. It is the ratio of housing costs without any debts to your gross monthly income. You will be eligible if you have a front-end ratio of 28% and a back-end ratio of 36%. You need to maintain these ratios for good interests. These are the minimum, and depending on other factors and the type of refinancing, they may vary accordingly.
Cash Reserves
You need enough cash reserves for your new mortgage payment for the next sixty days. In the mortgage world, cash reserves are perceived as your ability to pay the mortgage payment. You need to pay your payment for two months if you want to qualify for good interest rates. They can help you reduce your rates by paying points.
Closing Thoughts
Knowledge of minimum requirements to qualify for the mortgage is essential. Keeping up with all the essential scores and requirements boosts your chances of getting excellent refinancing rates. The federal government’s decision to redirect the funds to covid-19 relief has brought down the refinancing costs to an all-time low. If you haven’t refinanced yet, you should definitely at least look at what It would save you a lot monthly, but over the term of the loan, it would save you thousands of dollars. In some cases where your income is good, like a raise at your work, you can pay off your 30-year loan in only 15 years by trading your higher interest mortgage for a less expensive one. Find your best refinancing rates and apply now for mortgage refinance.