Can I Refinance?

A Stroller Moment at the House
••• Jeff R Clow / Getty Images

Refinancing is the process of getting a loan to pay off another loan. Doing so may allow you to save money on interest, lower your monthly payment, or get into a loan with the features you want (like a rate that never changes).

The question many borrowers face is “Can I refinance?” Getting a loan requires that you go through the approval process again, and that’s never any fun. To make the experience more bearable, it may help to look over your finances in the same way a lender would before you submit an application. That exercise helps you identify potential problems and focus your efforts on improving your chances of qualifying for a new (and better) loan.

Can I Qualify for Refinancing?

To qualify for most loans, you need the following:

  1. Decent credit
  2. Sufficient income
  3. Sufficient equity

Let’s break those down.

Decent credit: You don’t need perfect credit, but the fewer problems in your credit history, the better. But those problems aren’t a life sentence. Some programs even let you borrow to buy a home within one or two years after bankruptcy. The key is to make your credit look as good as you realistically can.

  1. Know your credit: Start by ordering your credit reports, which is free for U.S. consumers.
  2. Fix errors: Review each entry in your reports and verify that it’s accurate. In particular, you’re looking for negative items like late payments and collections. If those shouldn’t be on your report, get them removed. If the information is accurate, you might not be able to remove it, but it’s worth a try.
  3. Pay down balances: Your credit score suffers when you max out your cards. If you have free cash available (that you won’t need after you borrow), consider paying down your loan balances. Alternatively, you can request credit limit increases. Either way, staying well below your credit limits may help you qualify for a better loan.

    Sufficient income: You also need income to repay your new loan. Income might have been plentiful when you got your current loan, but can you refinance in your current situation?

    1. How much do you need? Start by understanding what the monthly payments look like. A basic loan calculator can tell you what to expect for required payments.
    2. Can you cover it? Next, verify that your debt-to-income ratio is reasonable. Lenders need to verify that your monthly payment won’t eat up too much of your current income. In many cases, refinancing actually improves your ratios, but moving to a new lender can still be hard if the ratios aren’t ideal.

    Sufficient equity: Get familiar with your loan-to-value ratio (LTV), which is a way of understanding how much equity you have.

    1. Home loans: In most cases, you can refinance homes up to 80 percent LTV, although it may be possible to go higher. If you do so, it’s harder to qualify, and you may have to pay mortgage insurance expenses.
    2. Auto loans: You can refinance a vehicle at any time, and lenders may even allow you to go up to 100 percent LTV. The limits depend on your vehicle (new, used, motorcycle, or RV, for example).

    Challenges Refinancing

    If you find that you can’t refinance because lenders don’t like your credit, income, or LTV ratios, there may be a solution.

    Cosigners might help: If your credit or income is to blame, consider asking a cosigner to sign for the loan with you. That person can make lenders more confident about getting repaid. If your cosigner has strong credit, approval is even more likely. But cosigning for somebody is risky, so that person needs to be up for any problems that may arise.

    Loan programs: If you can’t refinance because you don’t have sufficient equity (or your home is under water), investigate government programs. Several refinance programs help homeowners who have fallen on hard times. You can only refinance through these programs if you meet certain criteria, but it’s always worth a try.

    In general, government loan programs are your best bet if you can’t refinance with a bank or mortgage broker. Those programs have the most generous terms when it comes to credit scores and home equity.

    Moving Forward

    Ultimately, the only way to find out if you can refinance is to apply for a loan When you’re ready to move forward, contact a lender and start a conversation. Discuss your income, your property, and what you hope to get out of the deal. For more detailed instructions, see How to Refinance.