Do You Qualify for a Mortgage Refinance?

There are many factors that go into approving someone for a mortgage. Here is what you need to know.

I get plenty of calls from homeowners who are looking to refinance their mortgages, but, for a variety of reasons, mortgage do not get approved. In this article, I want to share with you what an underwriter looks at when deciding to grant you a mortgage.

Credit Score
The first item that is looked at, is your credit score. If your score is below a 500, your mortgage options are severely limited.

Loan to Value Ratio
The maximum loan to value you can obtain is limited by your credit score. If you are between a 500 and a 540, you can typically borrow no more than 80% of the value of your home. Between 540 and 580, up to 90%, and over 600, you can usually go up to 100% of the value of your home.

Appraised Value
Lenders look at the appraised value of your home and sometimes send out their own appraiser, who will often come in with a value that is lower. When home values are declining, lenders look at the realism of the appraised value.

Notice of Default
If you have had a notice of default or pre-foreclosure notice within the past 24 months on any property, your odds of getting a mortgage are very slim. Even if it is an investment property, you can not have a NOD on your record.

Debt to Income Ratio
A lender will look at your total debt as a percentage of your gross monthly income. What I do is to take your current mortgage balance, add to it any debts you want to pay off, add in the closing costs and any cash that you want to take out for other purposes and compute your interest payment. To that, I will add in your property taxes, homeowner’s insurance, any condo or association fees you pay, plus any remaining long-term debts that you have such as other credit card balances, car payments, student loans, or any other loan that you have. Any loans that will be paid off in less than a year don’t count.

Then, I will look at your total gross monthly income, including income from your job, any side jobs, alimony, child support, rental income and so on. If your total debts are more than 40% of your total gross monthly income for a conventional loan or 55% for a sub-prime loan, then I know that you would not be approved for a loan.

Misstating Income
If the income is not sufficient to do the deal, many loan officers will tell the borrower to “go stated”, meaning that, apply for a mortgage that does not require proof of income. However, this does not mean that, you or me can misstate the income, meaning that, create the income that is needed to do the deal. This is mortgage fraud and can end up putting you in jail. If you are self employed or have a side job or rental income, you are required by law to state the true income that you actually made on average over the past 2 years. You can not state that you expect to make twice as much money this year and use that argument to support an inflated income on your mortgage application.

Do You Have a Job that Qualifies?
Lenders want to see that you have been employed for at least the past two years. You either need to provide tax returns and current pay stubs from your employer, or if you are self employed, you need to either provide a business license or a letter from a CPA stating that, you have been in that particular line of work for the past two years. If you are just starting a job after having been out of work for several months or more, you may not get approved. If you are self employed and don’t have anything that shows you are set up as a legitimate business, then, you are considered unemployed.

Level of Documentation
You can get a higher loan to value ratio by going full doc. This means you have to provide 2 year’s tax returns, 2 month’s current pay stubs, and copies of assets such as checking account statements or investment records. If you go “stated income”, you may not have to provide any proof of income or assets, but your maximum loan to value may be reduced, and your interest rate will be higher. Thus, your DTI may then be higher than the 40% or 55% cut off that most lenders have and you won’t get the loan.

Title Seasoning
If you are not on the title of the property, many lenders will not let you just get added on and then qualify to do the refinance. I see this often in family situations, where, a family member wants to refinance the property to pull out cash, but, is not on the title. Most lenders want to see you on the title for at least 3 and sometimes as long as 6 months.

Rehabbed Properties
If you are a real estate investor who likes to purchase, rehab and then refinance or resell a property, you can create a problem if you have only been on the title for less than 3 to 6 months. Also, if you purchase an ugly property on the cheap, fix it up and then sell it for 4 or 5 times the original purchase price. Most lenders will not accept the new appraised value if it is within 6 months of the purchase. Typically, these deals have been tainted by fraudulent appraisals and lenders stay away from them.

Owner Occupied or Not?
If you are trying to refinance a rental property, you can not claim that, it is your personal residence. Underwriting requirements are sometimes more strict for investment properties or second homes, and the interest rates can be more than a point higher.

Charge-offs and Collection Accounts
Some lenders have a threshold on the amount of bad debt in your name, such as charge offs, repossessions and collection accounts. The typical threshold is $5,000 for some lenders. Other lenders only look at delinquent items that affect title, such as liens or municipal collection accounts.

Liens and Judgments
If you have any liens or judgments that affect title, they need to be paid off with some of your refinance proceeds. I have seen deals go bad when the available cash would not even cover these liens.

Hopefully I have given you the information you need to make a successful refinance deal. I hope I have earned your business.

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