Underwriter Requirements for a Home Refinance

Even though it's become more difficult to refinance a mortgage, many borrowers still qualify.

Stockbyte/Stockbyte/Getty Images

The bursting real estate bubble that started in 2008, followed by the large number of mortgage loan defaults, made lenders rethink the way they made mortgage loans. Underwriting guidelines became more stringent because of these defaults and the subsequent losses. Even though mortgage refinance loans are more difficult to get, many borrowers still qualify and can get approved. If you do not qualify for a conventional mortgage, you may qualify for an FHA loan.

Proof of Income

You will need to prove that you earn enough income to qualify for a mortgage refinance loan. The most common way of doing this for people who are employed is to provide a series of your last four to eight pay statements. You will also have to provide copies of your complete income tax returns. If you are self-employed, the lender will base your qualifying income on what you claim for income on these returns. In any case, certain deductions, such as employee business expenses, will be subtracted from your income for loan-qualifying purposes.

Income Requirements

A lender wants to ensure that you have income enough to make the payments on the loan you are applying for, and will usually require that the mortgage payments be no more than a certain percentage of your income. Most lenders will want to see your monthly mortgage payment be no higher than 26 percent to 28 percent of your monthly gross income. In addition, your total debt payments should be no higher than 34 percent to 36 percent of your monthly gross income.

Credit Score

Your credit score, that three-digit number based on your loan-repayment history, credit utilization and other factors, will be an important part of determining if you qualify for a mortgage refinance. Fannie Mae and Freddie Mac, the two companies that purchase mortgages for resale, require that your credit score be more than 620 in order to obtain a mortgage loan. Also, if you have a Chapter 7 bankruptcy, it must be at least four years post-discharge before you are considered.

Loan-to-Value Ratio

A bank will look for a certain loan-to-value ratio when qualifying you for a loan. This means that the bank will only loan a certain percentage of the value of the property, which will be determined with an appraisal. Most banks will only loan up to 80 percent of the value of the property in a mortgage, unless you take other steps to secure the loan, such as purchasing private mortgage insurance. PMI may allow you to finance up to 95 percent of the value of the property. You pay a premium to the PMI company, and it in return guarantees the amount of the loan over 80 percent of loan-to-value is paid to the bank in case of default.

FHA Differences

The Federal Housing Administration offers insured loans for people who may not otherwise qualify for a mortgage refinance. Many of the underwriting guidelines are looser for FHA loans, including a lower credit score requirement, often allowing loans with credit scores as low as 500. In addition, loan-to-value ratios may be much higher, and income ratio requirements more favorable. In return for this, you will pay a higher interest rate, as well as an extra premium for this insurance.