When a lender refinances, they are in fact taking on your old loan and giving you a brand new loan. The terms, conditions, and interest rate change. Just as you would need to qualify when taking out a new loan, you also need to qualify for refinancing. Lenders vary widely in terms of their eligibility criteria for refinancing. But there are some requirements that are standard to all. These are some of the common refinance requirements that most lenders set.
A credit score is the first thing that lenders will look into when evaluating loan applications. Your score reveals a lot about how responsible you are with your finances. A high score means you are diligent about making your monthly payments on time. This indicates that you are financially responsible and will get you approved more easily. Lenders will also offer you a more competitive interest rate if you have a high score. A low score indicates otherwise and you’ll find it difficult to get a low-interest loan.
The minimum credit score requirement also varies from one lender to another. Most will only approve if your score is at 650 or higher.
Credit utilization ratio refers to your total credit limit and how much of it you’ve been using. It is indicated as a percentage. A low credit utilization ratio means you aren’t using your too much of your available credit for your monthly expense. You’re managing comfortably with your monthly income. Here again, the exact value varies by lender. Most require a maximum of 50% to be eligible for refinancing. The lower the better to get approved.
If you have a steady job with a consistent monthly income, chances are you’ll be able to afford the monthly payments. This is good news to lenders as you are less likely to miss payments or default on your loan.
Having graduated with a degree is another common refinance requirement. This is because graduates have a better chance of finding higher-paying jobs lowering the risk of missed payments. It is possible to refinance without a degree, though it’s more difficult and fewer lenders offer it as an option.
Processing refinancing application involves a lot of paperwork and man-hours. This costs the lender. Imposing a minimum refinancing amount ensures that it’s worth their time. Also, a larger refinancing amount means more interest, which makes it a better investment altogether.
If your current student loan remains unpaid for a certain number of days and is in default, the lender won’t approve your application. Defaulting on a loan is an indication of financial distress. Lenders don’t want the hassle of dealing with someone who’s already struggling to make their payments. You can only refinance student loans that are currently all paid up.
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