Refinancing overview -> Qualifying


Since the housing crisis, strict lending standards
have limited the refinance possibilities for many people.

Many borrowers have found it difficult to refinance in the wake of the mortgage market meltdown. For some, declining property values have made qualifying for a conventional loan impossible. For others, much tighter qualifying guidelines have proven intractable. While special programs like HARP and lender loan modifications have helped, many have found themselves shut out of the refinance market.

The most difficult issue today for many borrowers who got their loans before 2009 is income qualifying. Prior to that time, many lenders enticed borrowers with easy qualifying and adjustable rate loans, yet when those same borrowers came back to refinance after the housing crisis they found themselves unable to qualify, even if their payment history was perfect and their new payment would be much lower.

Today, the maximum payment for which you qualify is derived strictly from verified income and you cannot exceed the maximum debt-to-income ratio allowed on the loan program you have chosen. If the lender will not permit a debt-to-income ratio higher than 43%, then the monthly payments for your housing (mortgage + insurance/HOA + property tax), revolving debt, and installment debt cannot exceed 43% of your gross (pre-tax) monthly income.

However, the allowable debt-to-income ratio, and the way your income is calculated, can vary slightly among lenders and loan programs. If you have been told by your current lender that you don’t qualify for a refinance, you may want to speak to an experienced mortgage broker with access to a wide range of lenders and loan programs. For example, some lenders will impute income from your savings, including retirement, even if you are not reporting dividend or interest income on your tax return; other lenders will not. The lenders who will consider assets when figuring income each use different formulas for figuring this income. If you need to use income from assets to qualify, you may need to check multiple lending sources.

Two other important variables in qualifying are interest rate and loan type, which may vary widely among different lenders. For example, you may find that you don’t qualify for a fully amortizing 30-year fixed rate loan. Another option might be an adjustable rate loan with the interest rate fixed for 5, 7, or 10 years. If your current loan is adjusting annually, or is about to, and you don’t qualify for the 30-year fixed that you want, you may want to settle for a new ARM with an initial fixed period.