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Home Refinance: 5 Key Factors That Make or Break Loan Approval

By Barbara Marquand
Mortgage Credit Problems Columnist


Refinancing a mortgage is often a good idea in a market with low interest rates, but whether you can get mortgage refinancing is another matter.

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Lenders today are cautious and home values have dropped, making it tough to get a loan with better terms. Still, it's an option to consider, particularly if you've got a high-interest bad credit mortgage or an adjustable rate mortgage that will go up when rates rise.

Here are five key factors lenders will consider:

1. Home Value

You'll probably have to get a formal appraisal during the mortgage refinance application process. For now, check recent sales of comparable homes in your neighborhood to get a rough idea.

2. Current Bad Credit Mortgage: How Much You Owe

Check how much principal is left to pay off on your mortgage. Subtract that number from the estimated value of your home to determine how much equity you have. If you're under water -- the value has dropped below the amount you owe -- then you won't be able to get conventional mortgage refinancing. Check whether you can get help through the federal government's Making Home Affordable program, which offers home refinancing for up to 125% of the property value and loan modifications in some instances. Hurry, though. The refinancing program expires June 10, 2010, and the modification program expires Dec. 31, 2012.

3. Credit Score

You'll need a good credit score to qualify for the best interest rates. You might have luck with an FHA refinance if you've got poor credit. Get FHA loan quotes from lenders using the form on this page. In the meantime, do what you can to improve your credit score. Get copies of your credit reports through AnnualCreditReport.com, and if you find factual errors, follow directions from the credit bureaus to get them fixed. Sometimes just fixing one error can raise your score. Fixing your own money management mistakes will take longer. The prescription is simple: Pay down your debt, and pay your bills on time.

4. Income

Generally, your monthly housing expenses, including insurance and taxes, should be no more than 28% of your gross monthly income. A stable job history is a big plus. Be prepared to jump through more hoops if you're self-employed or you've job hopped.

5. Debts and Assets

Your total long-term monthly debt should be no more than 38% of your gross monthly income. Avoid taking out more loans before refinancing, and pay down your credit card balances and other debts as much as you can.

Sources

http://www.homeloanlearningcenter.com/ / http://www.cnbc.com / http://www.makinghomeaffordable.gov

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