You may have decided that refinancing is the ideal option for you, but, this doesn’t imply that you would get a mortgage at your desired rate of interest! There’s a lot of prep work that needs to be done to ensure that the financier approves your loan. Again, there may be situations your refinance mortgage may get approved, but at a higher rate of interest! So, the aim is not just to qualify for a refinance loan, but to garner a mortgage, which offers great features as well as a cheap rate of interest!
Here’s a list of things you need to consider before you take the plunge:
What does the Lender Look For in a Refinance Deal?
Each lender, be it bank or non-bank, has its own set of guidelines for assessing a potential borrower. However, there are a few basic parameters, which you need to fulfill to make yourself an attractive candidate for a home loan refinance:
1. Minimum 20% ownership of the equity of the house
Before delving into the subject, first, let’s understand, what is equity? When you divide the principal amount you intend to borrow by the value of your property, the resultant figure that you get is the equity of your house. So, for instance, your home has been valued at $550,000 and you are on the lookout to borrow $400,000, then you have a 28% equity position in your house. To arrive at this figure, your lender shall carry out a valuation of the property. Nevertheless, you can always get a rough idea about your ownership of equity by analyzing the recent sales of similar houses in your locality.
2. Credit score
Your credit score will give a fair idea to the lender whether you are likely to make on-time mortgage repayments. Your credit score primarily depends upon five factors:
- Payment history
- Length of credit history
- Utilization ratio
- Types of credit in use
- New credit
The higher the credit score, higher are the chances of qualifying for the refinance mortgage. However, that doesn’t necessarily mean that if you have a bad credit history, your proposal will be out rightly rejected. There are lenders in the market who specialize in providing home loan refinance bad credit.
3. Other debts
Apart from your home loan, you may also have other debts, such as car loans, personal loans, student loans, and credit card balances. Your lender will assess your mortgage payments and income to calculate the debt-to-income (DTI) ratio. While each financier may have a different criterion, the standard practice is to look for a DTI of about 38%, which would ensure that you have enough cash left to meet your refinance repayments after paying for your other debts.
4. Sources of Income
By analyzing your sources of income, the lender would want to ensure that you have a steady flow of income, which will continue in the future too. The aim is to assess that you are fully equipped to make your repayments on time throughout the term of the mortgage.
The financier will also evaluate the amount of savings you possess, to analyze whether you are adept to make your repayments, even in the event of reduced income.
How to Prepare for the Home Loan Refinance Process?
Before approaching the lender, it is a good idea to analyze your financial position and make the necessary arrangements so that your refinance approval can arrive easily. Here’s how you can prep up for your first meeting with the lender:
1. Evaluate your credit report
Credit reports are the first things a lender would want to see. Arrange for your credit report and analyze through the entries to make sure that there aren’t any discrepancies. In case, you find any errors, take an immediate action to rectify the same.
2. What’s your credit score and how can you increase it?
Your credit score is influenced by your payment history and credit utilization. An error in your credit report may negatively impact your credit score. If you notice that your score is lower in comparison to the national averages, then you need to look for some avenues to bring it a notch higher. Of course, you can’t expect it to increase overnight, but things like clearing out your balances on your credit cards and accrued loans will surely help.
3. Research, research, and research
When it comes to home loan refinance, research is the key. You need to look for the various loan products and their corresponding interest rates available in the market. This will help you to gain an understanding of the average rates, so that when you meet with your financier, you will precisely know whether you are being charged a higher or a lower rate.
4. Formulate a budget
Make sure that you do a reality check to understand your borrowing potential. Create a budget, and take into account your monthly income and expenses. See if you have enough funds to make the 20% down payment. Again, you would have to allocate some cash towards a contingency fund for emergency situations. You would also want to save for your retirement days.
5. Calculate debt-to-income ratio
As mentioned earlier, DTI plays an important role in the decision of approving a refinance loan. To get an idea of your DTI ratio, you need to consider your net income and the total payment you make towards mortgages. Ensure to factor in estimated interest, property taxes, and insurance while calculating the mortgage repayment. Once you arrive at both the figures, then, divide the monthly repayment amount by your net income to generate your DTI. Anything within the range of 36% to 40% will increase your probability of getting your mortgage approved.
How to Carry Out Home Loan Refinance Comparison?
With thousands of loan products in the market, comparisons across features and interest rates may seem like a herculean task! In such a scenario, it is advisable to make use of a home loan refinance calculator, which would give you a rough estimate of your loan affordability, monthly repayments, the costs of refinancing, savings of money, and much more! While a calculator can generate some estimated numbers for you, it is only an expert mortgage broker, who can make you aware with the real picture, and advise you on improving your financial situation, thereby leading you to your destination of availing a mortgage at a cheap rate of interest!
Keep the Documents Handy
Some of the documents which you would need to arrange include:
Salary slips (For salaried employees)
Proof of identity
Copy of existing loan statements
Statements of Investment Account
List of Assets & Liabilities
Tax Returns (For self-employed individuals / Businessmen)
Refinance Today Can Help You At Every Step of Your Journey!
The entire journey of making the switch from one loan to another or from one lender to another is not as easy as it sounds! Wouldn’t it be great if you could have someone to guide & assist you, negotiate with lenders on your behalf, secure the best home loan refinance offers for you, and help you with all the paperwork? Well, that’s what Refinance Today is all about! Instead of just helping you tick the boxes, we stand by your side in your journey, so that you don’t feel alone!
How Are We Different From Our Peers?
Because at Refinance Today, it’s all about you, your needs, and your future plans! You just need to share them with us! The more we learn about you, the more equipped we become to help you achieve your dreams of owning a house in Australia! The core of our activities revolves around assisting you in the four primary aspects of: