Section 6: Contract Guidelines

. VA STREAMLINE     loan contract guidelines

. What to avoid:

- while under contract

. see what you qualify for

Home refinance

Home refinance options allow a borrower to replace their current mortgage with a new one with new terms.

When should you engage in a home refinance?

There are a few ways in which it might make sense for your to refinance your home mortgage. However, there are also a lot of reasons why you should not consider doing so.

People will often engage in a mortgage refinance if they can lower their monthly payments without extending the term length of the loan. This means that the current refinancing rates are lower than the rates you already are locked in. By shopping around, you can find the best and most current refinancing rates on the market.

Other reasons why people refinance include tapping into the equity of their mortgage or paying off the loan at a faster rate. Some people will be looking to get rid of their FHA mortgage insurance while others will want to changes from an adjustable-rate mortgage to one that has a fixed rate.

What are the different types of mortgages?

A loan to purchase a home, a home equity loan, or a home refinance loan requires different types of mortgages. There are two main types of mortgages currently used to purchase a home: government-insured loans and conventional loans. A government-insured loan provides a safety net for lenders in case of default. A conventional loan doesn’t provide this safety net, so interest rates, down payment requirements, and fees may be higher. Each type will have varying requirements and uses.

How to refinance your mortgage

If you are looking at home refinance options, then you have an abundance of choices. The majority of home mortgage lenders will also offer some sort of refinancing option. Some people like to use more traditional institutions like banks or credit unions to refinance their homes. Others prefer to go down the online route as they often have the best refinance rates and also tend to be a lot quicker.

If you have made the decision to refinance your mortgage, then you will first need to look at a mortgage refinance calculator. This will give you an idea as to what the refinance rates today might be, as well as what size loan you can expect.

All you need to do is input some core data and you will be able to see what savings you could expect at today’s refinance rates. This will often also showcase the fees associated with refinancing your mortgage. Therefore, you can quickly figure out if refinancing is a good option for you or not.

Step 1: Determine why you want to refinance

Before you refinance your home loan, be sure to think about why you want to refinance in the first place. Here are a few potential reasons why refinancing your mortgage could be a good idea:

You want to lower your interest rate

When you bought your home, mortgage rates were likely much higher than they are now. Or maybe your credit wasn’t as strong, so you had to settle for a higher rate. By refinancing your mortgage, you might be able to lower your interest rate and save money over the life of your loan.

You want to reduce your monthly payment

When you refinance your mortgage, you take out a new home loan with a new loan term. If you choose to extend your repayment term, you could get a lower monthly payment, which will give you more breathing room in your budget. You might also end up with a reduced monthly payment if you qualify for a lower interest rate.

You want to pay off your home early

If you decide to shorten your repayment term (such as going from a 30-year loan to a 15-year loan), you’ll have a higher monthly payment — but you also might be able to pay off your loan faster. With a shorter loan term, you’ll be paying much less in interest charges, which will bring the overall cost of your mortgage down.

You want to switch from an adjustable-rate mortgage to a fixed-rate mortgage

If you’re worried about your interest rate fluctuating, you could switch your loan from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage by refinancing. With a fixed-rate mortgage, your interest rate will stay the same for the entire length of your loan.

You want cash for home improvements or other needs

With a cash-out refinance, you replace your current mortgage with a new loan for more than you owe on your home. You’ll get the difference between the loan and your existing mortgage in cash, which you could use to pay for home improvements, your child’s college education, debt consolidation, or other expenses.

Step 2: Wait the minimum amount of time to refinance your home

Depending on the type of mortgage you want and the lender you go through, you might have to wait a certain amount of time after you close on your original mortgage to refinance.

Here are some typical wait times you might experience:

• Cash-out refinance: If you’re planning on a cash-out refinance, you typically have to wait six months after your original mortgage closes.
• FHA loan: To refinance an FHA loan with an FHA Streamline Refinance loan, you have to wait 210 days.
• Loan modification: If you modified your original loan to make your loan payments more affordable, you might have to wait as long as 24 months to refinance.

Find Out: How Soon Can You Refinance: Typical Waiting Periods By Home Loan

How home equity and loan-to-value ratio impact refinancing

No matter what type of mortgage you have, your home’s equity plays a big role in your ability to refinance. Lenders will look at your home’s equity and loan-to-value (LTV) ratio to determine if you’re eligible for mortgage refinancing. Here’s how each of these work:

• Equity is the amount your home is currently worth, minus what you currently owe on your existing mortgage. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, your home’s equity is $100,000.
• LTV ratio is how much you owe on the mortgage divided by the current value of the home. For example, if your home is worth $300,000 and you owe $200,000, you would divide $200,000 by $300,000 to get an LTV of 66.67%.

Typically, you only need 5% equity for a conventional refinance. But keep in mind that if your equity is less than 20%, you’ll pay higher fees, have a higher interest rate, and have to pay for mortgage insurance.

If you have an FHA loan, there’s an FHA streamline program that lets you refinance even if you have negative equity. However, mortgage insurance is required.

Learn More: Cash-Out Refinancing vs. Home Equity Loan: How to Choose

Step 3: Meet credit score and DTI requirements

Next, make sure your credit score and debt-to-income (DTI) ratio meet lenders’ refinancing requirements.

Here are the typical criteria you’ll have to meet:

• Credit score: For a conventional mortgage refinance, you’ll generally need a credit score of 620 or higher. But some government programs have credit score requirements as low as 500 — or even no credit score minimum at all, such as with the Department of Veteran’s Affairs Interest Rate Reduction Refinance Loan.
• DTI ratio: Your DTI ratio is the total amount of your monthly debt payments divided by your gross monthly income. This is what lenders look at when deciding if you’ll be able to afford your mortgage payments. In most cases, the highest DTI you can have to get approved for mortgage refinancing is 43%.

Learn More: When to Refinance a Mortgage

Step 4: Have the necessary paperwork ready

When you refinance your mortgage, you’ll usually need to have a significant amount of paperwork to provide proof of your income, assets, employment, credit, and property. It’s a good idea to gather the following documentationbefore meeting with a lender:

Learn More: How to Get Pre-Approved for a Mortgage

Step 5: Have the cash to pay closing costs — or roll them into your new loan

Closing costs generally range from 2% to 5% of the loan principal. On average, the closing costs on a mortgage refinance are about $5,000, according to Freddie Mac. While you don’t have to have cash on hand to cover your closing costs, paying the costs upfront could help you save money on interest charges over time.

If you don’t have enough cash saved to cover your closing costs, you might be able to take advantage of a no-closing-cost refinance.

There are two types of no-closing-cost refinancing:

1. The lender pays your closing costs but charges you a higher interest rate. The higher rate applies to the loan until you either pay it off or refinance again.
2. Your lender rolls the closing costs into your loan’s principal. You don’t have to pay the closing costs upfront, but you’ll pay interest on the closing costs over the life of the loan.

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. Conventional refinance eligibility   (CLICK)