The conventional refinance mortgage can be an incredibly flexible financial tool. You can borrow on your home’s equity, lower your interest rate and payment, cancel mortgage insurance on FHA or USDA loans, or consolidate high-interest debts.
Our first step in using this powerful tool is to determine if you’re eligible to refinance your mortgage. This guide will help you prepare to qualify and get you connected to one of our professional mortgage loan officers to start the process.
How is your credit score?
Your credit score is a significant factor in determining your eligibility to refinance.
You’re probably familiar with credit scoring from when you purchased your home. Your credit score will range from 300-850 and is used to indicate creditworthiness. Lenders look at this credit score to determine your refinancing eligibility and the interest rate you can get for your refinance. The higher your score, the easier it is to qualify and the better your interest rate.
What is your current home equity?
Another factor in qualifying for a refinance is the equity in your home.
Typically, you will want to have at least 20% equity in your home to refinance your mortgage. However, there may be options to refinance with less than 20% equity in your home if you have a good credit score.
If you’re looking to get rid of mortgage insurance or are looking for a cash-out refinance, you will need 20% equity.
If you are thinking about refinancing an FHA or VA loan for an interest rate reduction, there may be no equity requirements for these streamlined loan products.
Adding up other debts
Another essential qualifying requirement is your debt-to-income ratio (DTI). Your DTI is the ratio of your total minimum monthly debt divided by your gross monthly income.
In qualifying for your refinance, we will total up your minimum monthly payments for car loans, student loans, credit cards, mortgages, and other recurring debts. The lower your DTI, the easier it is to qualify for a refinance loan.
Covering closing costs
There are some necessary costs associated with refinancing your mortgage – loan origination fees, appraisal fees, prepaid property taxes, title fees, credit checks, and other associated fees. These fees are called closing costs.
Often closing costs can be rolled into the new mortgage.
Gather up a few documents
One of the best ways to get a quick and accurate refinance rate quote is to have everything at your fingertips and ready to send to your loan officer. Here are some of the documents you will need to have in hand.
Proof of Income
In reviewing your finances to approve your refinance, we will need to see proof of income. This proof may include W-2s, tax returns, and 1099s. You, and any co-borrowers, will typically need to provide two to three months of pay stubs.
If you are self-employed, you often need to provide two years of income tax returns and profit and loan statements.
Homeowners Insurance Verification
To refinance your home, you will also need to prove that you have a current insurance policy, and it must be sufficient to cover the lender’s requirements.
Title insurance is protection against any problems or disputes that might arise with the title of your property. You most likely purchased a title insurance policy when you purchased your home. During the refinance process, we will request a copy of this policy.
Let’s get started
Okay, are you ready to refinance and get that lower rate and payment or maybe take some cash out? Your next step is to contact one of our professional mortgage loan officers.
Answer a few simple, quick questions.
Get a free rate quote and loan options.
Types of Conventional Loan Programs
Conventional loans are generally any mortgage that is not insured or guaranteed by the federal government, as opposed to government-insured loans, including the Federal Housing Administration (FHA), the U.S. Department of Veteran Affairs (VA), and the U.S. Department of Agriculture (USDA). Conventional mortgages (whether conforming or not) typically have a slightly higher down payment than government loans; however, this loan option generally provides more flexibility with fewer restrictions.
These conventional loans can come in a variety of types. A few of these conventional loan types are listed below.
An adjustable-rate mortgage (ARM) is a loan term option with interest rates that can change periodically after the initial fixed-rate period. After this introductory period, monthly payments are susceptible to increases or decreases based on market fluctuations, affecting the monthly payment. An ARM could be the right choice for you if you plan on staying in your home for just a few years, you’re expecting a future pay increase or the current interest rate on a fixed-rate mortgage is too high.
Fixed-rate mortgages protect you against rising rates since the interest rate remains the same for the loan’s entire term. Plus, you have the option of selecting a 10, 15, 20, 25, or 30-year term. The main difference is that the lower term options have higher monthly payments, which means you are building home equity faster. Keep in mind you can use equity as a down payment for your next home or a future cash-out refinance. If you plan on staying in your home for a longer time frame, a fixed-rate mortgage could be the right solution for you.
A jumbo loan, or non-conforming mortgage, allows you to purchase more expensive homes with a loan amount above the conforming limit set by the Federal Housing Finance Agency. In most areas, the conventional conforming loan limit is $548,250; however, the limit is $765,600 in higher-cost areas. If you have a low debt-to-income (DTI) ratio and a higher credit score, but you don’t have enough funds to bring the loan amount under the conforming limit, a jumbo loan might be the right option for you.