Lending Rules on Refinancing

Home Equity

Refinancing without 20 percent equity in your home can prove challenging, and some lenders will not consider approving your home loan application. But just because one lender rejects your application doesn't mean you have to give up hope. Several options are available to people with little to no equity in their property. For example, FHA mortgage loans are more flexible and allow refinances with only 5 percent equity; if you're eligible for a VA Home loan, you don't need equity to refinance. Other programs, such as Making Home Affordable, approve refinances up to 125 percent of the home's value.

Mortgage lenders place great emphasis on credit scores; if you plan on refinancing your mortgage loan, check your credit score and report beforehand to assess whether you're able to qualify for a home loan. Lenders differ, and while one mortgage company may approve your request with a 620 credit score, another lender may require a 740 credit score. To alleviate any hassles, take steps to fix any credit problems before meeting with lenders and achieve the best possible score. Payment history and debt to income ratio greatly influence your credit profile. Qualify easily for a refinance by paying bills on time and paying down consumer debt.

Credit profiles aren't the only thing mortgage lenders take into account. They will request documentation pertaining to your personal income to see if you meet the requirements for a home loan. Affordability is key with any mortgage loan, and a change in your income can result in a refinance rejection. For example, has your income decreased since applying for the original home loan? Are you currently unemployed? Paycheck stubs, w-2s or yearly tax returns help mortgage lenders determine eligibility. Forward these documents with your refinance application.

There is no way around settlement fees or closing costs; and while some lenders offer "no closing costs" refinancing, understand that closing costs are inevitable and you will have to pay the lender a fee for their services. However, if choosing a "no closing costs" refinance, mortgage lenders do not require a check from you on the closing date. Instead, they will roll your settlement or closing fees into your new mortgage loan. There's the option of declining this option and paying for your closing fees out-of-pocket. Closing costs can cost up to six percent of the mortgage balance.