Mortgage Refinancing - Your Finances

When deciding whether or not to grant a loan, creditors look for an ability to repay debt and a willingness to do so. When considering these factors they examine the three Cs of credit: capacity, character and collateral.

Capacity. Can you repay the debt? Creditors ask for employment information: your occupation, how long you've worked, and how much you earn. They also want to know your expenses:
- How many dependents you have.
- Whether you pay alimony or child support.
- Amount of your other obligations.
  
  The magic number that quantifies your capacity is your Debt-to-Income Ratio, or DTI. It is simply your total monthly payments divided by your gross monthly income.
Character. Will you repay the debt? Creditors will look at your credit history to see how much you owe, how often you borrow, whether you pay bills on time, and whether you live within your means. They also look for signs of stability:
- How long you've lived at your present address.
- Whether you own or rent.
- Length of your present employment.
  
  The important number here is your credit score. The higher, the better.
Collateral. Is the lender fully protected if you fail to repay? Creditors want to know what you may have that could be used to back up or secure your loan, and what assets you have other than income for repaying the debt. In other words, what can they take from you if you default on the loan. The most important piece of collateral, of course, is the property you're refinancing. The higher the loan amount relative to the appraised property value, the more nervous lenders get. This ratio, by the way, is called Loan-to-Value, or LTV.

Creditors use different combinations of these facts in reaching their decisions. Some set extremely high standards and other lenders simply do not make certain kinds of loans.

Some rely strictly on their own instinct and experience, while others use credit scores to predict whether you're a good credit risk. They assign a certain number of points to each of the various characteristics that have proved to be reliable signs that a borrower will repay. Then, they rate you on this scale.

And so, different creditors may reach different conclusions based on the same set of facts. One may find you an acceptable risk, while another may deny you a loan.