Refinance Mortgage Pre-Qualification
What You NEED TO KNOW!

In today’s ever-changing world of mortgage refinance home loans, it is more important than ever for refinancing homeowners to receive a thorough pre-qualification. It's never a good idea to jump into the refinance loan process with a blindfold on.

Don't jump into the refinance loan process with a blindfold on.

Underwriting guidelines continue to be updated at a rapid pace, and you need to know if you have a solid loan application that will result in a successful loan, within a reasonable degree of certainty.

Submit Mortgage Application Now
Ask Questions Later Approach

Unfortunately, many refinance mortgage salespeople take the “ask as few questions as possible” approach to pre-qualifying a home loan. The theory is that the less questions you ask, the less number of potential roadblocks, and the greater chance that the borrower will delay their mortgage application decision.

After all, what do they care? The borrower is the one that shells out the hard cash for the appraisal, spends hours retrieving and faxing documents, and may be financially depending upon a successful loan closing. If the loan is declined, then oh well, it’s on to the next borrower. To many, it’s just a Numbers Game!

To many refinance salespeople, it's just a numbers game.

You deserve better, and we will discuss a few of the major pre-qualification areas that you should be aware of, so you can make sure that your loan officer covers them for you, before you commit to a refinance mortgage application.

You should also know that there is no 100 percent guarantee that a loan will close successfully based upon a pre-qualification, but your degree of certainty improves greatly with a solid pre-qualification.

In the event that you do not qualify, at least not for the mortgage program that you want, you will know what qualifications you do need in order to apply in the future.

The areas we will cover are Goals, Income, Credit, and Equity for home loan pre-qualification purposes.

Home Refinance Goals, Timeframes,
and Program Choice

First things first. Before you even speak with a mortgage lender about refinancing your home, you should have an initial goal and timeframe for your potential new mortgage. It could be as simple as “I want to save $200 per month and plan to stay in my new mortgage for 10 years”. Maybe your goal is to shorten your loan term, consolidate bills, get cash-out, etc.

Specific refinance goals can lead to a better loan program choice.

The point is that without a goal and a timeframe for your new refinance, you may be leaving a better refinance loan program on the table, one that you may not be aware of. A proper home loan program choice for your specific loan scenario alone, can lead to an additional benefit of thousands to tens of thousands over a mortgage loan that does not fit you future plans to the max.

Make sure to tell your loan officer what your loan goal and timeframe is, and they should be able to direct you to the best loan options for you. This is a very important step in the refinance home mortgage pre-qualification process. Now on to the fun stuff!

Income: Pre-Qualification for a
Mortgage Refinance

Your Gross Monthly Income is a vital factor in determining your Debt-to-Income Ratio (DTI) for mortgage qualification purposes. At a time when “Stated Income” refinance loan options have seemingly disappeared from the lending landscape, most borrowers will have to fully document their income.

You need to know how much of your income can be applied toward your DTI. In some cases, only a portion, or even none of a potential borrower’s income can be used toward their DTI calculation.

You need to know how much of your income can be applied for refinance qualification purposes.

The following are some Key General Points regarding Income Eligibility rules followed by many lenders for Refinance Mortgage qualification:

W2 Wage Earners

Borrower will need to have been employed for at least 2 full years
Bonuses, commissions, overtime, and additional part-time work must be substantiated by the borrower’s previous two year’s earnings. In some cases, verification will be required that such “secondary” type of income will occur in the future.

Self-Employed Individuals

You will need to have been in business for at least 2 years. Income will be derived from your “bottom-line” or “net income”, after expense write-offs.

Sole proprietors should find their “net profit” figure on the Schedule C form submitted with their income tax returns.

General Partnerships, Limited Partnerships, and S-Corporation income will be found on the Schedule K-1 submitted with borrower’s income tax returns.

Corporation income will be derived from your IRS 1120S income tax returns.

Rental Income

Borrower will need to have rented the unit/units for at least 24 months and verify with income tax return Schedule E
Borrower will need to supply a current lease agreement held with tenants
Allowable income will generally be between 70% and 75% of rental proceeds

Alimony and Child Support Income

Alimony and Child Support income will need to be verified with a court order displaying payment terms. Payments will most likely need to continue for an additional three years in order to be allowable as income.

Social Security and Disability Income

Social Security payments are allowable income and can be verified by the borrower’s issued yearly award letter
Disability payments are allowable income, but the borrower will most likely have to provide a letter stating that the payments will continue for at least another 36 months, or verification of when the borrower will return to work (stating that the disability payments will continue until the return to work).

Retirement and Pension Income

Retirement and pension are allowable income and require verification from the source or federal tax returns. If any benefits expire within the first full three years, the income will most likely not be allowable.

Credit: Pre-Qualification for a
Mortgage Refinance

Your Credit Score and Credit Report details also play a vital factor in determining your mortgage refinance eligibility.

The following are some Key General Points regarding Credit Eligibility rules followed by many lenders for Refinance Mortgage qualification:

Credit Score

A borrower will be required to have a minimum 620 mid fico credit score (middle of the scores from Equifax, Transunion, and Experian) for home loan refinance eligibility.

Judgments and Collections

Court-ordered judgements will most likely need to be paid off before the borrower is eligible for a mortgage loan. An exception can possibly be where the borrower has agreed with the creditor to make regular and timely payments on the judgment and documentation is provided that the payments have been made in accordance with the agreement.
Collections may or may not be required to be paid off as a condition of mortgage approval, but can be considered in the analysis of the creditworthiness of the borrower. In many cases, collections reporting as “unpaid” on a credit report have in fact, been satisfied by the borrower. In this instance, the borrower only needs to show the proof of satisfaction on that account.

Mortgage Late Payments

Borrowers with mortgage late payments within the previous 12 months will generally have difficulty acquiring a mortgage approval. Most lenders guidelines have tightened in this regard.

Chapter 7 and Chapter 13 Bankruptcies

A Chapter 7 bankruptcy does not disqualify a borrower from obtaining a refinance mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy. Additionally, the borrower must have re-established good credit.
A Chapter 13 bankruptcy does not disqualify a borrower from obtaining a refinance mortgage if at least 12 months have elapsed since the date of the discharge of the bankruptcy. Additionally, the borrower must have re-established good credit.

Foreclosures

A borrower whose previous principal residence or other real property was foreclosed or has given a deed-in-lieu of foreclosure within the previous three years is generally not eligible for a new refinance mortgage.

Equity: Pre-Qualification for a
Mortgage Refinance

Your home’s value is a vital factor, not only in determining your qualification for a refinance mortgage, but also for the home loan programs for which you are eligible.

Home value is a vital factor in determining refinance mortgage qualification.

In a time when housing values are volatile, it is more important than ever that you do the best you can to estimate the current fair market value of your home in the pre-qualification stage. Artificially inflating the value of your home will do you no favors in gathering great home loan rate quotes because the actual appraised home value will be the final say for mortgage and interest rate qualification purposes.

For instance. Suppose that a couple is refinancing their home mortgage in the amount of $250,000 and feel that the value of their home is $330,000, based on the sales prices of similar homes in their area. This would put their Loan-to-Value (LTV) Ratio at under 80 percent (250,000 divided by 330,000 = 76%), and create a loan scenario where they are eligible for the best refinance rates on the market.

Total loan amount divided by home value = Loan-to-Value (LTV) Ratio.

The borrowers did not know that their neighboring homes for sale were being listed for around $330,000, but were really selling for around $290,000 (most of a home appraisal is based on the actual sales prices of similar homes in the area of the subject home). The borrowers also failed to do any of the numerous free online home estimation checks that would have shown a lower projected appraisal value for their home.

Unfortunately, their loan advisor either neglected to check for the borrower’s home value or did check and chose not to inform their customer. Definitely not a thorough pre-qualification!

So, the borrowers apply for the refinance mortgage and pay $400 for the appraisal, thinking that they have the best-offered interest rate and everything is fine and dandy. Right?

Not so fast. The appraisal is completed and comes in at $290,000. Now What?

Ms. Loan Salesperson says, Oh Well, You win some and you lose some.

Well, the loan is not lost, it just has to be re-qualified based on the $290,000 appraised value figure. This means that the actual qualified LTV is 86% (250,000 divided by 290,000 = 86%).

The interest rate goes up because the LTV went over 80%, plus private mortgage insurance (PMI) in the amount of $150 per month is added to the mortgage payment. These two factors will limit, if not totally negate the original benefit the borrowers thought they were going to achieve with the refinance as originally qualified.

Hopefully, there is still a benefit there after the bump-up in interest rate and added PMI.

Now lets further suppose that the borrowers are refinancing their $250,000 mortgage and feel that the value of their home is $270,000 based on neighboring home list sales prices. Again, they neglect to check their home’s estimated value online, which is showing a $240,000 value for their home. Mr. Loan advisor comes in with another substandard pre-qualification performance and doesn’t mention the online value to the borrower. Hey, what could go wrong? They’re doing an FHA refinance, and can go up to a 97% LTV.

You guessed it! The borrowers apply and pay for the appraisal only to have the appraised value come back at $235,000.

Frustrated borrower after a shoddy refinance pre-qualification. Now, the loan is lost unless the borrowers want to shell out $22,732 to make up the difference for a 97% LTV loan scenario. So the borrowers are now out of the appraisal fee, a substantial amount of time and effort, and have gained a boatload of aggravation for their effort. A simple solid pre-qualification could have avoided this mess for the borrowers.

Now, if a loan advisor informs a client of a lower online home estimation value than the borrower’s initial estimate, and the borrower still wants to move ahead with the loan, at least they are fully informed.

It may be that the lower online estimate still creates a scenario for a desired benefit. Maybe the lower online values are so close to a successful loan qualification, and the benefit so great, that the fully informed borrower wishes to risk the chance that it might not work out.

The key is that the borrower is informed.

It is also very important to note that free online comp-checks for home value estimation are only just that – an estimation. Some lenders can guarantee a borrower’s rate lock and most of their closing costs, but can never guarantee what an actual appraisal will come in at. A borrower can only estimate a pre-qualification home value based on a reasoned and informed judgment.

A mortgage refinance is a huge financial decision for a homeowner, and borrowers deserve nothing less than a solid and thorough pre-qualification!

A Word About High-Pressure
Refinance Mortgage Sales Tactics

Most people who have shopped around to different lenders for refinance loan comparisons have likely encountered a “High-Pressure Sales Tactic”.

High-Pressure salesman ready to attack.

High-Pressure loan salespeople will usually talk very fast, ask rapid-fire questions, and aggressively ask for a borrower’s personal information immediately. They will rapidly spout out numbers and rates, and quickly point out that they have the best deal for you and their competition doesn’t come close. They have the best rates, closing costs, and service. Their deal is so good that you have to apply now!

High-Pressure sales tactics can be intimidating, aggressive, and confusing for the borrower. The aim is to get the homeowner to apply for their refinance loan before they have a chance to think. After all, Mr. Loan Salesperson is the professional, he seems to know what he talking about, and he says that my loan is a Slam-Dunk! I would feel silly passing up on this great deal, and really don’t want to go through any more of these sales calls. I’ll Apply Now!

There is a suggested time to make an “Apply Now” decision (discussed in our Refinance Closing Costs and the Bottom Line and When To Lock Your Rate sections), but that time is not after a shoddy refinance loan pre-qualification with a high-pressure salesperson.

Mr. High-Pressure Salesman promises that he has the best deal for you if you apply today! Now, Mr. High-Pressure Salesperson may actually have the best rates, closing costs, and service (probably not) for your loan scenario, or he may not. But one thing is for sure. The chances of a shoddy borrower pre-qualification will increase with a High-Pressure salesperson.

You could fall into the “Submit Mortgage Application Now, and Ask Questions Later” trap. This approach increases the risk of a less beneficial than available refinance program selection, loan denial, problems in loan processing, or a later change to a less beneficial loan program.

Be very careful in dealing with High-Pressure Salespeople. Don’t worry, you’ll know when you speak with one!

A Solid Refinance Mortgage
Pre-Qualification Equals More
Borrower Control

Maybe it’s just stating the obvious, but the more thorough a refinance mortgage pre-qualification, the more the control that goes to the borrower.

A thorough refinance pre-qualification equals a borrower with more control.

As we have stated earlier, there is no 100% guarantee with refinance loan applications, but the more vital variables that are pinned down during the pre-qualification process, the better the chance of a successful mortgage transaction, and the better the homeowner will feel going into the loan process.

You are Ready!

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Refinance Home Loan?

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