Mortgage Refinancing and Qualifying Criteria

If you want to know if you qualify to refinance your home mortgage, it is necessary to understand the factors that go into making a decision to approve or deny a loan. If you are a self-employed borrower, the underwriting guidelines are different than if you are a W2 wage earner.

This article will discuss qualifying when you are a Wage earner. Most lenders will require your last 2 years of tax returns in addition to your last 2 years of W2s and your most recent paystub showing your year to date earnings.  If you have categories of income besides your base income, such as bonus, overtime, or commission income, it will be necessary to order a verification of employment (VOE) to get the breakout of your other types of income for the last 2 years. A track record of having these other types of income for the last 2 years is necessary in order for the income to be considered for qualifying purposes.

Other types of income include IRA withdrawals. This is acceptable when you have been taking these tor a few years already and there are sufficient funds in your retirement account to last at least 3 more years. Alimony & child support payments can also be used for qualifying as long as they continue at least 3 years into the future. If there is a divorce decree or separation agreement, these will stipulate how long the payments will continue. For example, if a child is now 16 and the payments stop when they turn 18, the income cannot be used as there is not at least 3 years of payments remaining.

Once your income has been determined, it is necessary to look at your liabilities on your credit report and find out your total monthly payments. Your debt to income ratio (DTI) must be under 50% in most cases to receive an automated approval from the desktop underwriting system (DU). When a lender has received an Approve/Eligible response upon submitting your loan through the system, the lender  knows that they will be able to sell your loan to Fannie Mae after they fund your loan. The DU findings will dictate the types of conditions which will be necessary for the loan approval. It will spell out the required documentation that you will have to provide to the lender in order for the lender to approve and fund your loan.   In addition to the findings provided from DU, some lenders have what are referred to as overlays, and these lenders have additional requirements to the du findings. Besides the DU system, there is also the Freddie Mac loan prospector system. This is used instead of DU if your loan parameters are outside of DU. Typically this system is used when you need more flexibility with underwriting criteria such as a higher loan to value.

Your total DTI is composed of your primary housing payment, which is is your principal, interest, taxes, hazard insurance, and mortgage insurance (if any) as well as homeowners association fee (if any) plus your other payments.  For a refinance mortgage your mortgage payment will be based on the new interest rate you will be receiving. In case you own one or more rental properties, the information for these properties will be taken from your tax returns if the property appears on schedule E. Underwriters will take your expenses and normally average over 2 years as long as the income did not decline. When income declines from one year to the next, only the current year with the lower income will be used.

All of the consumer credit items are added up and added to the primary housing payment. Any rental income or loss is factored in, and then this number is divided by the total income to arrive at the debt to income ratio. As long as you are under 50%, you should be able to receive a favorable automated underwriting decision. Factors affecting the decision include your credit score, liquid assets, and employment history.  Normally you will not receive an approve/eligible response if your score is below a 620.  This is considered a low score, and this is where the line is drawn in the sand for most cases in home loan approvals. There are other programs for those with a score below at 620, however for most people, it is better to work on your credit scores than pay the high price of getting an FHA loan with mortgage insurance, or a subprime loan at a substantially higher interest rate. For some, however, this is the only choice available, and these options can be taken initially and later refinanced into a better quality loan.