Mortgage Refinancing – How Does It Work?

You might be thinking of refinancing your mortgage for a few reasons—like taking advantage of lower interest rates, switching mortgage companies, reducing monthly mortgage payments, or using money from the refinance for a big purchase.

If you have never refinanced a home, you most likely have a lot of questions about the process. With rates being at an all-time low, you might be feeling the pressure to jump on the opportunity before it’s gone.

It all starts with shopping! That’s right, just like when you applied for your original mortgage you need to start contacting lenders or use a broker to see if you qualify. You will expedite the process if you already have the documentation needed for the refinance organized and ready for submission. Although lenders look for different things, generally, most want to see the following information.

Income

Just like with your first mortgage, you need to prove that you have regular income that can support your debt-income ratio. Yes, the point of a mortgage is to lower your monthly payment, but lenders will always make sure you can still pay your bills prior to refinancing your loan.

Equity

It is unlikely that you will be able to refinance unless you have at least 10-20% equity in your home.

A Maintained Mortgage

In order to be considered for a refinance you need to show that you have maintained your current mortgage for the last 12 months without any missed or partial payments.

Credit Status

Your credit score will be pulled and re-assessed for the refinance. Having a lower credit score will impact the rate you qualify for with the refinance.

In the rare case that you do not have one of the line items above, lenders will use a manual underwriting process to figure out your risk or likelihood of paying your mortgage on time.