If you took a subprime mortgage because you had a low credit score, high debt ratio, or some other reason that kept you from getting a mortgage, you may wonder if you can get out of it at some point. The truth is that if you work hard, you probably can get out of a subprime loan. You aren’t stuck with it forever, as they don’t have prepayment penalties in most cases.
So when should you refinance? Keep reading to find out more.
What’s Your Credit Score?
First, you should think about your credit score. Was a low score the reason you needed a subprime loan? If so, what have you done to increase your credit score in the meantime? Do you know what your credit score is right now? If you don’t, you can find out typically from your bank and/or credit card companies as they usually offer free access to your credit score.
You can also pull your free credit reports from www.annualcreditreport.com. These reports won’t give you a score, but they will let you look at your credit history. How does it look? Have you made your payments on time? Do you have any negative information reporting? Is your credit overextended or did you keep your utilization rate at less than 30% of your credit line?
Looking at the big picture will help you see if you’ve improved your credit score. If you have, you are well on your way to being able to refinance your subprime mortgage into something a little less expensive.
What’s Your Debt Ratio?
If you want to refinance your subprime loan into a conventional loan, you’ll have to work on your debt ratio. Even government-backed loans have guidelines regarding the debt ratio, which are typically lower than what you were able to get away with on your subprime loan.
The debt ratio requirements are as follows:
- Conventional loans – 28% housing ratio and 36% total debt ratio
- FHA loans – 31% housing ratio and 41% total debt ratio
- USDA loans – 29% housing ratio and 31% total debt ratio
- VA loans – 41% – 43% total debt ratio
The lower your debt ratio is, the more likely you are to be able to refinance your subprime mortgage. The good news is that if you qualify for a conventional or government-backed loan, you’ll likely get a lower interest rate, which means your debt ratio will automatically lower due to the lower mortgage payment.
What’s Your Loan-to-Value Ratio?
If you didn’t make a large down payment on your home when you bought it, you might still have a high LTV or loan-to-value ratio. Lenders like to see that you built up some equity in your home before they’ll refinance your subprime loan.
While the minimum LTV requirements for each loan program aren’t that strict, many lenders will enforce stricter requirements because of the fact that you have a subprime loan. The current LTV requirements are as follows:
- Conventional loans – 95%
- FHA loans – 97.5%
- USDA loans – 100%
- VA loans – 100%
These guidelines are typically for those that are buying a home with that program. If you want to refinance into one of these programs, lenders may like it if you have a little equity in your home. This helps to offset the risk of default because you have your own money invested in the home.
If you want a conventional loan and you want to avoid paying Private Mortgage Insurance, you’ll need 20% equity in your home. When you owe less than 80% of the home’s value, lenders won’t charge you PMI. This can save you hundreds of dollars on your mortgage and is worth waiting until you get to that point.
The bottom line is that you need to make your ‘big picture’ look as good as possible. This means having a high credit score, low debt ratio, and as much equity in the home as possible. The more ‘good factors’ that you can have on your application, the better your chances of being able to refinance your subprime loan into a non-subprime loan become.Click to See the Latest Mortgage Rates»