Section 6: Conventional Loan Refinancing
Conventional Loan Refinancing
The Conventional Home Loan program provides qualified homeowners with a simple way to take advantage of rates and decrease their monthly mortgage payment. Beyond that, military homeowners can get cash back on a conventional refinance and use the proceeds for a variety of needs, from paying off debt or making home improvements and much more. Now the current economic climate makes a great time or many homeowners to take advantage of the numerous benefits found in a conventional refinance.
To get started, call, or start your Conventional Refinance quote online.
When Should you Refinance a Conventional Loan?
In general, you should refinance a Conventional loan if:
Your Home’s Value Has Gone Up
If you have built equity in your home either by the housing prices rising or paying down your loan it might be a good time to refinance. If you need to lower your interest rate, need cash to pay off debts, or do an additional project on your home then a refinance might be the best option for you.
10 steps to Refinance Your Conventional Loan
Most borrowers follow the following Conventional refinance steps:
1. Determine if you still need a Conventional loan.
The criteria for Conventional loans changes each year FHFA sets the conforming loan limits. If your existing loan balance exceeds these limits, a Conventional refinance loan may be your only option.
2. Check your credit scores.
Many Conventional lenders set the minimum bar at 700 for a Conventional loan. That’s 80 points higher than the conventional minimum, so make sure you check your credit score before you apply for a Conventional refinance.
3. Make sure your debt-to-income (DTI) ratios are in line.
Conventional lenders measure your DTI ratio by dividing your total debt by your gross income, and 45% is the standard maximum. That’s significantly lower than the 50% ratio conforming lenders allow.
4. Shop for the best Conventional refinance rates.
Some lenders specialize in Conventional loans. Banks may even offer lower rates if you carry large deposit balances with them. Compare loan estimates with at least three to five lenders to make sure you’re getting the best deal.
5. Ask the lender when you can lock in your rate.
Conventional lenders may require a loan approval before locking in your rate. Conventional rates change daily, so make sure you know your lender’s lock policy to avoid any surprises in the terms of your rate later in the process.
6. Provide your paperwork promptly.
Because Conventional lenders don’t allow automated approvals, you’ll have to provide more financial paperwork. Conventional loans typically take longer to close than standard loans, because a human underwriter is involved in the decision making and is responsible for ensuring the loan meets Conventional investor standards.
7. Keep your cash liquid.
It’s not uncommon for a Conventional lender to require proof of six to 24 months’ worth of mortgage payment reserves in a liquid account, meaning it can be easily converted to cash.
8. Plan for a pricey appraisal.
If you’ve got a custom home or a lot of square footage, appraisers may charge more to find comparable homes, and for the extra legwork it will take to measure out and list all the amenities in your home.
9. Notify your escrow officer and loan officer of any trusts in advance.
Lenders want to make sure they can collect on a Conventional loan if you default, and they may require extra steps to approve any trust your property is held in. Escrow officers may also need a copy of the trust to properly prepare your closing documents.
10. Review your closing disclosure and close.
Like any refinance, you’ll receive a closing disclosure three business days before your closing. Review the paperwork and make sure the numbers are what you expected. If everything looks correct, your loan documents will be returned to the lender, your old Conventional loan balance will be paid off with the funds from your new Conventional loan.
Conventional Refinance Requirements
. At least 20% equity in your home
. A minimum 700 credit score
. Total debt that doesn’t exceed 45% of your income
. No major credit problems in your recent past, such as bankruptcies or foreclosures
. Full documentation of all sources of income including tax returns, paystubs, CPA letters and IRS validation of all filed tax forms
* Requirements may very program to program and lender to lender
How to Get the Best Conventional Refinance Rates
Conventional lenders typically set interest rates based on their own standards. Shopping for the best Conventional refinance rates could save you thousands or even hundreds of thousands of dollars over the life of the loan.
You’ll typically snag the best Conventional mortgage refinance rates if you:
Have a high credit score.
Although 700 is the minimum, Conventional lenders may reward higher-credit-score borrowers with lower rates and closing costs.
Don’t borrow the maximum.
Conventional lenders may offer a lower rate if you’ve built up substantial equity and just want to refinance to save on your monthly payment (and not tap equity).
Avoid niche Conventional loan programs.
Some Conventional lenders offer special programs to make Conventional refinance qualification easier, such as using bank statements instead of tax returns to prove income. These flexibilities usually require you to pay a premium in the form of a higher interest rate.
Two Great Conventional Loan Refinancing Options
Traditional Conventional Refinance
A conventional refinance is simply a non-government backed loan used to refinance or replace an existing mortgage. Like conventional loans, a conventional refinance offers fantastic rates, lower costs, and greater flexibility than other programs.
Cash-Out Refinance
A "Cash-Out" refinance is an option for those with a conventional loan looking to take advantage of their home's equity to access cash for home improvements, emergencies, pay off debt, or any other purpose.
Thinking about refinancing? Speak with an Orbit Home Loan specialist to discuss your options.
Conventional Refinance Eligibility
In general, any borrower with solid credit and some money for a down payment will satisfy conventional loan qualification requirements. However, because conventional loans aren’t insured or guaranteed by the government, their eligibility requirements for borrowers are usually tougher to meet than the requirements for government-backed mortgages. These include FHA loans, which are insured by the Federal Housing Administration; VA loans, guaranteed in part by the Department of Veterans Affairs; and USDA loans, the program run by the U.S. Department of Agriculture. Also keep in mind that conventional lenders are free to enforce requirements that are stricter than the guidelines set by the FHFA, Fannie and Freddie. If you’re applying for a conventional mortgage after foreclosure or bankruptcy, for example, you might have more trouble qualifying.
See What You Qualify For