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Preparing for Your Refinance

From radio ads to TV commercials, newscasters and co-workers, lots of people are talking about refinancing. Trouble is not everyone meets the basic requirements for a refinance, nor do they know how to prepare for one. But the good news is preparing for refinance isn’t difficult. More people could meet those basic requirements with a little research and preparation. It’s no different than earning a better score on the SAT or ACT exams for entrance into a better college. The only way to succeed on the test is to know some of the questions that will be asked. The same can be said when it comes to working with mortgage lenders. Knowing what to expect from lenders and familiarizing yourself with their requirements will better prepare you for a refinance and could result in a faster closing. Here are some things to keep in mind.

Before beginning the process of refinancing your mortgage, you should have an objective in mind. While most homeowners want to get a better interest rate on their home loan others may wish to change an adjustable rate to a fixed rate. Still, others may wish to take advantage of the equity they have in their home and refinance in order to borrow cash they’ll use to pay for home improvements, to consolidate debt or to start a business. In any case, it’s a good idea to establish the goal you have in mind so you can then prepare for what’s required to achieve your goal.

You should be prepared for mortgage lenders to order copies of your credit report from one or all three credit bureaus. Historically, people with high credit scores are less likely to default on mortgage loans. Because some homeowners have developed bad credit habits after qualifying for a mortgage loan, lenders have to check credit to ensure that a borrower is still eligible for a mortgage loan. A history of late payments (especially late or missed mortgage payments), a significant decrease in credit score or a bankruptcy can hinder refinance approval. For most refinancing a credit score of 680 or higher is required while a score 740 or higher helps a borrower to get a better mortgage rate on a new home loan. You can improve your credit score by consistently managing your bills well, paying on time and keeping credit card balances at a minimum. Before applying for a refinance you’ll want to boost your credit rating as much as possible.

Another way to prepare for your refinance is to reduce your consumer debt. When a borrower has too many debts he increases his debt-to-income ratio. Mortgage lenders prefer to see borrowers keeping their monthly debt payments below 28% of their gross income. When you have thousands of dollars in credit card debt or you’ve taken out an expensive car loan, you increase your debt ratio and potentially risk your ability to qualify for a new home loan or refinance. Paying down your debt and finding ways to increase your income are good strategies to use before applying for a refinance.

If you plan to use the equity in your home as a means of refinancing in order to borrow cash, be sure that you have at least 20 percent equity in your home. With enough equity in your home you could refinance to eliminate private mortgage insurance and reduce your payments even further. Private mortgage insurance (PMI) protects lenders in the event the borrower defaults. PMI is required on mortgages without 20 percent equity. Assessing a home’s value through an appraisal is the way mortgage lenders check the equity in a property before refinancing.