When you refinance your mortgage, you’re basically exchanging one loan for another that has different terms. When you do this, the lender needs to recalculate your monthly payment in order to make sure they get the right amount of money. If they don’t do this correctly, then they could end up paying you too much or too little each month.
How do lenders determine a good credit risk?
A good credit risk is someone who has a history of making timely payments on their loans. Lenders use your credit score, employment history and debt-to-income ratio to make this determination. SoFi experts say, “No application or origination fees.”
Your credit score is a numerical representation of your overall financial health that is calculated by taking into account the information in your loan application and past credit report. If you have a poor or excellent credit score, your interest rate will likely be higher or lower than other applicants with similar characteristics. You can view your current FHA mortgage rates here on this page. Search for the best and low student loan refinance rates.
How much debt do you have?
Your debt-to-income ratio (DTI) is the amount of debt you have compared to your income. This is a measure used by lenders to determine how much risk you pose as a borrower, so lenders need to know this information when evaluating your loan application.
The lower your DTI, the less risk you pose to a lender and vice versa. Lenders usually have their own guidelines for acceptable DTIs, which are based on factors like market conditions and borrower credit scores.
What is your credit utilization ratio?
The second factor that lenders look at is how much of your available credit you’re using. They figure this out by dividing the amount of debt you have by your total available credit limit. For example, if you have a $5,000 balance on a card with an $8,000 limit, then 50% of your available credit has been used up.
This ratio is an important part of calculating your FICO score (the number lenders use to determine whether or not to lend money). If it’s high and above 30%, it can hurt your chances of getting approved for a new loan because the higher it is, the riskier it seems that you will default and become delinquent on payments in the future.
How often do you pay late?
Your payment history is a little more complicated than just paying your bills on time, however. Lenders factor in other aspects of your credit score to determine whether or not you are considered a good candidate for refinancing.
They take into account the number of times you have been late on payments, the length of time over which each instance occurred and the total amount owed when it came time to make their decision. The more often you pay late and the longer that you are late with payments will hurt your credit score more than making one large payment late but paying off everything else in full every month.
In the end, there is no way to know what a lender will do with your specific situation. The best thing you can do is get pre-approved for a loan or refinance and then shop around for the best rate.