Refinancing Regulations

Refinance regulations include being current on the current mortgage.houses cottages image by david hughes from Fotolia.com

Home owners refinance for many reasons, some to obtain a lower interest rate and monthly payment, others to change the loan terms. For example, a person may refinance to change from a 30-year fixed rate to a 15-year fixed. They may also choose to refinance for debt consolidation, where there is considerable equity in the home and the proceeds would pay off revolving debts. There are regulations refinancing home owners should be aware of before considering this option.

Current Mortgage

One refinancing regulation is that the home owner's current mortgage must be exactly that - current. When considering options such as refinancing, home owners need to be aware the current mortgage on the home cannot be delinquent or defaulted in any way.

Home owners who are delinquent on a current mortgage would not be eligible for a refinance; however, they may be eligible for something called a loan modification. This would be determined with the lender.

Another refinancing regulation is the length of time the home owners have lived in the current residence. Home owners must live in the home at least six months before being eligible for a refinance, according to regulations. It would be highly unlikely that a home owner would have equity in the home in fewer than six months. Additionally, the costs associated with refinancing a home, such as closing costs and appraisal, would leave even less benefit to the borrower if refinanced within six months of the original closing date.

The home owners' current mortgage terms cannot include a pre-payment penalty. This clause is occasionally attached to a mortgage program when the lender doesn't want the home owner to pay off the mortgage for a specified amount of time. A two-year penalty is common with many lenders. For example, when a home owner initially closes on a home, in the paperwork there will be a pre-payment penalty clause. This clause will state that if the home owner pays off the mortgage within a two-year period, there will be financial fees associated with it. This is considered to be paying off the mortgage company to allow the home owner out of the current mortgage. This rarely provides a benefit to the borrower.

The home owners must have good credit and must have maintained the debt-to-income ratio. When home owners close on the first mortgage they have good credit and an approved DTI. In the event of a refinance, the credit has to be good and the DTI cannot have dropped. The DTI may not be approved if the home owner has lost a job or taken on a considerable amount of debt.

The lender's underwriter will review the home owner's credit report for delinquent or defaulted payments. Additionally, any debt accrued since the original mortgage was taken out will be reviewed. If this additional debt is a certain percentage of the home owners' monthly income (determined by each lender) the refinance will most likely not be approved.