Refinancing a home is a process where homeowners obtain a new finance in turn of their existing mortgage with revised terms and interest rates. Most individuals opt for it to enjoy the benefits it brings. People falling under this category do not stick to their original home loan due to diverse reasons. As opting for refinance is similar to obtaining to a new loan, there are various problems that can arise when refinancing a house.
High Debt to Income Ratio
Debt to income ratio defines how much of your income is paid towards debts. Higher ratio means big part of earning is spent in paying for your debts and you might not have sufficient funds to pay off your new mortgage. As you are considered high risk borrowers in such a situation, your qualification for refinancing might be at stake. Lending institutions might not hesitate to reject your application. So, for you to secure approval for refinancing, maintaining low debt to income ratio is very important. Make sure you have repaid all your debts before you apply for refinance.
Whether it is applying for new finance or a revised mortgage, having a good credit score is vital as it plays a major role in deciding upon your approval. Unfortunately, when applying for revised mortgage, many homeowners encounter credit issues that appear on their credit report, many of which are not known to them. In a number of cases, the lenders can correct these issues, provided the borrower has proper documents that can be presented to credit agency as a proof. If bad credit rating is the issue, the borrower would probably have to wait for some time, until the credit score is improved, before applying for the same again.
High Loan to Value Ratio
Another common problem that can lower the chances of approval for home refinance is having high loan to value ratio. It is what defines how much of the total loan amount is left to be paid. Lending institutions do not refinance a mortgage if the amount is higher as compared to the value of real estate. To get away with this problem, borrowers must make sure to have low loan to value ratio. This can be ensured by paying the installments on time without defaulting on the original mortgage.
High Closing Costs
People opt for refinance to save some money. For a fact a revised mortgage with lower rates and lenient loan terms is affordable, borrowers can save a big amount in the long run. However, in some cases, homeowners realize that the closing cost of refinance is too high and rather than benefiting, it would add to the balance of the loan. When you find yourself in such a situation, it is better to shop around for refinance options as all lenders are not the same.
Since refinancing a mortgage is a big decision, make certain to evaluate your financial credibility before applying for it. It will not only help you in knowing whether you really need to refinance your home, but will also help you in qualifying for the same.
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