Refinancing a house in today’s mortgage industry, lenders first look at the Homeowners credit score, to see if the score is acceptable for a loan to be done. Depending on the credit score some programs might or might not be allowable. Most government loans (FHA and VA) require a 600/620 credit score and at least a 640 is needed for a Conventional loan (Fannie Mae or Freddie Mac). Certain programs are still available below the above mentioned credit scores, but might require larger equity positions.
After knowing if the credit score is acceptable, the appraised value of the property is extremely important. The reason the appraised value is very important is because the refinance plan is based on the perceived value (which is an unknown until appraisal is done). Unlike a purchase, the value of the property on a refinance is not as obvious because there is no sales contract.
The other two factors which determine the approvability of the refinance are the borrower’s debt to income ratio and the borrower’s financial ability (ability pay for closing costs/pre-paids if not able to roll back into the new loan). The various loan programs require different equity positions (loan to value) based on type of loan refinance. If the refinance is a “rate and term” refinance or a “cash out” refinance will determine what the limitations which are required.
The various types of loans have guidelines which regulate the (DTI) debt to income ratios (monthly housing and credit debt/monthly income) limitation. The conventional DTI ratios are more conservative and will fall between 36 to 45% (depending on strength of the entire loan); the government loans DTI ratios range from 41% to 55% (depending on strength of entire loan). Your loan officer will understand how the various federal guidelines effect how the DTI is calculated.
The borrower’s financial ability is equity in property and whatever funds might be needed to complete the transaction. The loan guidelines are based upon the lesser of the sales price or the appraised value.
This description given above is meant for non-streamline (VA or FHA) refinances.