Refinancing
Refinancing
  Things to Consider
If you’ve decided that a refinance is in your near future, you can expect to provide much of the same documentation provided when you first financed your home. Having previously been through this process will give you an edge in streamlining the process.

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Government-backed loans of VA, FHA and USDA carry a “streamline” feature which requires much less paperwork than when you first applied for one of these loans.
  Credit Score

Your credit score is important in determining your ability to borrow money. These scores range from 300 to 850, with higher scores representing better credit. Scores are calculated using an algorithm and interpreted as a score by the three main credit repositories, Experian, Equifax and TransUnion. Different loan programs can have different minimum credit score requirements. With three reported credit scores, the lender will ignore the highest and lowest and use the middle score.

Credit scores are calculated by reviewing your payment history, credit balances, length of open credit accounts, and a number of other markers.

 Home Ownership Duration

You can refinance an existing mortgage in as little as 12 months after purchase with a conventional mortgage. Some programs allow for a waiting period of six months under special circumstances. As part of the valuation process, a home’s value should show a gradual increase over a 12 month period. FHA loans ask there be at least six payments made, or 210 days that have passed since the original date of the existing mortgage.

Bankruptcy and Foreclosure Waiting Periods
1. Bankruptcy
For a Chapter 7, VA and FHA requires a two year waiting period after the discharge of a bankruptcy while conventional loans ask for a four year waiting period. Both VA and FHA may allow for a new mortgage in as little as just one year if the bankruptcy can be shown to be caused outside the control of the borrowers. This is solely at a lender’s discretion. USDA loans require a three year waiting period.

With a Chapter 13, FHA and VA both allow for a purchase of a home as long as the purchase is approved by the trustee and timely payments have been made toward the repayment plan for at least one year. Conventional loans ask for a two year waiting period after discharge of the Chapter 13. Chapter 7 and 13 both require a reestablished, clean credit history.

2. Foreclosure
Conventional loans ask for a seven year waiting period or as short as three years if the foreclosure can be shown to have occurred beyond the borrower’s control. For those giving back the deed to the lender in lieu of a foreclosure, there is a three year waiting period. For an FHA loan, the waiting period after a foreclosure is also seven years. VA loans ask for a two year waiting period.
Income, DTI

Make sure you have copies of your most recent pay check stubs available along with your last two years of W2 forms. If you’re self-employed, you’ll need to provide your last two years of both personal and federal income tax returns along with a year-to-date profit and loss statement.
DTI stands for debt-to-income and is expressed as a percent or a ratio. A housing debt ratio for example might be 33, or 33 percent of an applicant’s gross monthly income. The housing ratio, sometimes referred to by lenders as the “front” ratio, consists the principal and interest payment, property taxes and insurance. Total DTI includes the housing ratio plus other monthly credit obligations such as an automobile loan or credit card payments.

For example, say a loan program asks for a 33 DTI ratio and someone makes $5,000 per month. 33 percent of $5,000 is $1,650. This is the amount allotted for the total mortgage payment. If the total DTI ratio is 41, then the amount allotted for total monthly credit obligations is $2,050.

Value of Home

When refinancing, conventional loans require at least a 10% equity position which means the final loan should not be greater than 90% of the current market value of the home. If the newly appraised value is $300,000 the conventional loan limit is 90% of that amount, or $270,000 which can include principal and interest plus closing costs. Conventional loans are those approved using standards issued by Fannie Mae and Freddie Mac. When pulling out cash during the transaction, the conventional limit rests at 80% of the value of the home.

VA loans do not require an appraisal when refinancing an existing VA loan into a new one so value is not an issue. FHA loans may require an appraisal when rolling closing costs into the new loan.

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