With any loan, whether it’s a home purchase loan, car loan, business loan or a loan to refinance a home mortgage, there are four primary areas that lenders look at. These areas are called the “4 C’s of Credit” and are used in some form or another to approve every single loan. If you want to be an educated, prepared borrower and get your loan approved, then this is the crash course you have been waiting for.The First C of Credit: CapacityCapacity is simply your ability to repay the debt. It is the single most important factor to the lender. After all, if you don’t have the cash flow (income) to make your payments for this loan and all of your other monthly obligations, then there is no need for the lender to even have a conversation with you. Generally, lenders want your monthly mortgage payment, including principal, interest, taxes and insurance to be below 28% of your monthly gross income. Additionally, they generally want your mortgage payment, plus all other monthly debt payments to be below 36% of your monthly gross income. Be prepared to provide 2 years of W-2s, and/or 2 months of pay stubs to support your application.The Second C of Credit: CapitalCapital is your safety net. It is the money that you have saved, which you can tap into if your Capacity is reduced or eliminated due to job loss or earnings reduction. It is best to be able to prove that you have been a consistent saver. Be prepared to provide 3-6 months of bank and non-retirement investment statements.The Third C of Credit: CollateralWhen you refinance a home mortgage, you are obviously going to use your home as collateral. With the declining real estate market, this has become one of the hardest parts of home refinance. Lenders will almost always require an appraisal. Generally, the loan to value (LTV) ratio must be at or below 80%. By using the FHA program, some lenders will go above this level, to 96.5%. Note, that if you have an LTV above 80%, you will be required to pay Private Mortgage Insurance (PMI). This will usually increase your monthly payments by at least 1%. To be prepared, check out what similar homes in your area have sold for by referencing websites like Zillow.com.The Fourth C of Credit: CreditThink about it, when you walk into a bank or mortgage company to refinance a home mortgage, you are a complete stranger asking for tens or hundreds of thousands of dollars. How do they know if you are a straight up guy or gal? Your credit score is your character reference. It is proof that you honor your obligations and have organized your financial life in such a way that you make your payments in a timely fashion. Scores range from 350 to 850. The average score in this country is 680, but you seriously want to be somewhere closer to 720 to get the best rates and lowest fees. A poor credit score can mean the difference between approval or decline. To be prepared, get a free copy of your credit report online, review it and clear up any discrepancies that may exist.You now have the tools that experts use to refinance a home mortgage. Preparation is key! Good luck!
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