3 refinance hurdles and how to jump them
Your loan-to-value and debt-to-income ratios are too high? Your credit score is too low? Fear not.
Low mortgage rates have made refinancing an attractive proposition for homeowners who want to cut their monthly payment, extend their term or restructure their housing debt. Yet there are hurdles that can make refinancing difficult. Here are three of the most common refinance hurdles and ways to overcome them. (Bing: Best places to refinance home loan?)
Hurdle No. 1: Your LTV is too high
Your loan-to-value ratio, or LTV, is your loan amount expressed as a percentage of your home's current value. For example, if you want to borrow $80,000 and your home is worth $100,000, your LTV is $80,000 divided by $100,000 or 80%.
A higher LTV won't preclude refinancing, but you'll probably have to purchase mortgage insurance, which protects the lender if you default on your loan.
Jump: If your LTV is on the high side, one option to consider might be the Home Affordable Refinance Program, which "allows certain borrowers who have loans that are owned or guaranteed by Fannie Mae or Freddie Mac to refinance without regard to the loan-to-value ratio," says Joe Parsons, senior loan officer at PFS Funding, a mortgage company in Dublin, Calif.
One catch, says Kirk Chivas, chief operating officer at First Commerce Financial in Wixom, Mich., is that your loan must have been originated on or before May 31, 2009, to refinance through HARP.
Two other high-LTV options might be the FHA Streamline Refinance program, if your loan is insured by the Federal Housing Administration, or a loan guaranteed by the Department of Veterans Affairs, if you qualify for that. Given its 100% financing, no mortgage insurance and flexible qualification guidelines, Parsons describes the VA loan as "the best loan on the planet, by far."
A different option would be to lower your LTV by paying off a chunk of your mortgage. This approach is known as a cash-in refinance.
Hurdle No. 2: Your DTI is too high
Your debt-to-income ratio, or DTI, measures your capacity to pay your debts. For example, if your monthly income is $4,000 and your monthly minimum payments on your credit cards and other nonhousing loans total $800, your DTI is $800 divided by $4,000 or 20%.
Lenders' DTI guidelines can be flexible, but if you're carrying a high debt load relative to your earnings, your DTI might be a barrier to refinancing.
Jump: To lower your DTI, you'll need to earn more money or pay off some of your debts. Often, however, neither of those approaches is realistic.
"Typically, there's no solution," Chivas says. "People have gotten themselves in this position due to poor decision-making or a job loss of one or two people working in the household."