Every year, people refinance their mortgages. They do so for a lot of reasons.
For many people, the motive is simply to get better terms, such as a better interest rate or a fixed-rate mortgage. For others, their financial situation has improved and they want to pay off the mortgage sooner rather than later. Some people also use it as a way to tap into their equity for a big purchase or for debt consolidation.
If you think mortgage refinancing is the right move for you, you want the process to go smoothly. That means understanding the refinancing requirements in advance so you gather everything you need. Keep reading for our refinancing guide.
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Time of Ownership
Most lenders require that you own the home for a period of time before they’ll consider you for refinancing. As a general rule, that means six months to a year, although longer is typically better. The longer you own the home, the more time you have for improvement projects that raise the home’s value.
Another consideration for the banks is your level of equity in the home. You can think of equity as the value of the home that actually belongs to you. You can build up equity in a couple of ways.
The main way people build equity is by paying on their mortgage over time. The more of the original mortgage you pay off in advance, the more equity you own. The more equity you own, the easier refinancing a house will become for you.
Improving the property is the other big way you can build equity. Within reason and the limits of your neighborhood property value, improvements boost your equity.
Your finances will also factor into the mortgage refinance decision. You’ll want to gather the same kinds of documents you used for the original loan, such as:
- Proof of income
- Proof of employment
- Tax returns
The lender will also consider factors like your debt-to-income ratio and your credit score. Banks typically look for credit scores of 620 or above.
Odds are good that your original mortgage agreement requires that you maintain homeowner’s insurance. The bank will want evidence that your homeowner’s insurance is current.
While you won’t need to get it a second time, the bank will also likely ask for a copy of the title insurance you got when you first purchased the home.
Refinancing Requirements and You
Refinancing lets homeowners do a variety of things that range from securing more favorable terms on their mortgage to consolidating debt or financing a large purchase. That means you must meet the refinancing requirements.
Some of those requirements are financial, such as a decent credit score, proof of income, and an adequate debt-to-income ratio. Others are more pragmatic, like your time of ownership and total equity. You’ll also need proof of current homeowner’s insurance and title insurance.
Looking for more tips on finance or loans? Check out some of the other posts in our Business section.