- If your loan is federally insured by the Federal Housing Administration and you want to refinance, consider its special Streamline Refinance process.
This loan, available only to customers who are current on their payments and already have FHA-guaranteed mortgages, is used specifically for lowering monthly principal and interest payments. Homeowners may not cash out, and there are closing costs (you may elect to roll the cost into the new interest rate).
The major advantage to this program is the "streamlined" application process, which requires less documentation from the homeowner. It also may not require an appraisal---a huge plus. - A second alternative is the federal government's HAMP, or Home Affordable Modification Program. Be advised that HAMP only works for homeowners who are having difficulty meeting their mortgage payments. The homeowner must live in the home, have a mortgage that originated prior to 2009, have a payment that's more than 31 percent of their gross monthly income, be able to document that you can afford the new payment and owe less than $729,750. You must also not have been convicted with a mortgage or real estate-related felony, including tax evasion. Credit scores are not considered in HAMP refinances.
- If neither of these programs are serious considerations for you, don't give up hope. Credit scores are not the only factor that lenders use to determine loan eligibility. Remember that employment and salary history, your savings and investments and your current debt ratio are critical components of an underwriting analysis. If you haven't ever been late on your mortgage, that's another positive. Consider using a local mortgage broker who will know what lenders require.
The amount of equity you have in your home is another factor. Lenders, especially in 2011, usually want to see at least 20 percent equity. Agreeing to bring funds to the close to meet this requirement may influence a lender's decision to refinance your loan. - Your first step should be to get your free annual credit reports from AnnualCreditReport.com. Consumers are eligible to get a free report annually. Review your report, noting any inaccuracies, and be sure to write to the reporting bureau to have the information corrected.
If the information is correct, remember that about 60 percent of your credit score is comprised of timely payments (35 percent) and balances owed (30 percent). Paying your bills on time and doing your best to reduce your debts quickly will help improve your score significantly.
These steps are worth doing in advance because the higher your score is, the lower your interest rate will be. Even improving your score by as little as 30 points may move you from "poor" to "fair" or from "fair" to "good," resulting in big interest savings: monitoring your score along with your finances allows for the greatest chance of success.
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