I just read a Q&A session on the MarketWatch website about a woman who had a refinance application denied by Wells Fargo. From the sound of it, she had sufficient equity in the home and never missed a mortgage payment in the past. On top of that, her payment would have gone down after the refinance, which is a requirement in most states.

Despite all of this, her refi application was denied by Wells Fargo. Why? Because her debt-to-income ratio changed since she took out her original mortgage, and lenders are paying more attention to DTI ratios these days. So let’s talk about debt, as it applies to the mortgage refinance process.

What is Debt-to-Income Ratio Anyway?

Debt-to-income ratio is exactly what it sounds like. It’s a comparison between your gross monthly income and what you pay toward debt each month.

Let’s look at an example, using some easy math. If you gross about $4,000 a month (before taxes), and you make about $2,000 in various debt payments each month, then your debt-to-income ratio is 50 percent. In other words, you are putting half of your gross income toward debt payments each month. This DTI ratio is too high for a refinance loan — at least in the eyes of most mortgage lenders today. So a person in this scenario would do well to pay down their debt balances as much as possible, before applying for a refi.

You can calculate your DTI quickly and easily, by using one of the many debt-to-income calculators that are available online. Here’s a calculator on the U.S. News website that’s really easy to use.

In some cases (like the MarketWatch scenario above), debt-to-income ratio can seem like a “dumb” indicator. In other words, a high DTI ratio can set off a red flag with a lender, even though a mortgage refinance might actually lower your monthly payments. That’s what happened to the person who wrote to MarketWatch for help.

Does it make sense? Not always. But, alas, it is what it is. And if you plan to refinance your home in the near future, you should check your debt-to-income ratio against the lender’s qualifications, and if your ratio is high you should work on paying down your debt. This will help you get approved for the refinancing process.

Get Multiple Refinance Quotes

This story also illustrates the need to get refinance quotes from more than one lender. The person who got turned down by Wells Fargo could turn around and get approved by another lender. Each company has its own criteria for refinance loans, and that includes the way they factor your debt-to-income ratio into the overall qualification process.

This is why we recommend using one of the big online lending sites to get get multiple refinancing quotes at once — it increases your chances for approval. You can use the link at the top of this blog post to get refi offers through LendingTree.

But this is also a subject that creates a lot of confusion among homeowners. So in this post, I’d like to explain the differences between these two things — mortgage refinance and modification — and point you in the right direction for further research.

Refinancing Your Home in 2009

When you refinance your home, you are replacing one mortgage loan with another. People do this for many reasons, but the most common reason is to save money by getting a lower interest rate on the new loan. But there’s a big reason for refinancing your home, and that’s to switch from an adjustable-rate mortgage loan to a fixed-rate loan.

According to the Treasury Department, another 400,000 ARM loans will be resetting through the rest of 2009, give or take a hundred or so. Many of these will reset to a higher interest rate, and even though this will be mitigated by low interest rates it will still increase the size of many people’s mortgage payments.

There’s plenty of information in the articles section of our website that will help you understand how refinancing works. But the challenge for many homeowners is the fact that they owe more on their mortgage than the home is currently worth. In fact, I’ve done a blog post on this particular subject, and you can read it here: Refinancing When Upside Down.

If you have sufficient equity in your home and a decent credit score, you may very well be qualified for a refinance loan — and it could save you money by taking advantage of low interest rates.You can use the Lending Tree at the top of this blog post to get refinancing offers from multiple lenders, if you’d like to get the ball rolling.

Home Loan Modifications in 2009

Modifying your home loan is different from refinancing, because you are keeping the same mortgage loan. Instead of replacing it with a new one, your lender would restructure or modify the loan in some way to make it more affordable. Normally, this involves changes to the interest rate or the terms of the loan.

Mortgage modifications are nothing new, but there’s going to be a lot more of them in the foreseeable future. This is because the Obama administration is creating home loan modification programs to try and reduce the number of foreclosures happening in the U.S. Among other things, this program will give monetary incentives to loan servicers for modifying mortgages. They are focusing on loans that meet a certain profile (i.e., at-risk homeowners who could face foreclosure soon).

On March 4, 2009, President Obama and his economic team will release more details about this program. So if you want to know if you’re eligible for a mortgage modification under the new plan, be sure to tune into the news on March 4. You can also learn more about this subject at the Home Buying Institute, where they recently posted a guide to mortgage relief plan being introduced.

Let me start with the easy answer, and then we will get more specific. The short answer is yes, it’s possible to refinance a mortgage after a bankruptcy filing. But there’s a big gap between possible and realistic. How realistic it is will depend on several factors:

How long ago was the bankruptcy and what has happened with your finances since then? What kind of bankruptcy was it — a Chapter 7 with no repayment of debt, or a Chapter 13 with full or partial repayment? How much equity do you have in the home? What’s your credit score?

These are just a few of the questions that would need to be answered when refinancing your after a bankruptcy filing. Now you can understand why there’s conflicting information about this subject. In some cases, a person could refinance a mortgage after bankruptcy while in other cases it would be nearly impossible.

Due to all of these variables, there is no way I could say whether or not refinancing is possible for you. But there’s one way to find out — apply for a refi loan and see what the lender tells you. Before you do that, it’s also a good idea to determine how much equity you have in your home (if any). I say this because, in many cities, property values have dropped a lot over the last year or so. Many people are finding that they now owe more on their mortgages than their homes are even worth, based on current / depressed home values. Being upside down in a loan like this takes refinance off the table entirely.

So the first step to refinancing a home after bankruptcy is to find out (A) what your current mortgage balance is and (B) what your home is worth in the current economy. Once you’ve done that, you can move on to other considerations.

Next, you should find out what your credit score is. As you are probably well aware, a bankruptcy filing will lower your score. With that being said, it tends to have less of an impact as time goes on. So it’s possible to increase your credit score following a bankruptcy filing, and doing so will help you qualify for mortgage refinancing.

It’s true that some financial institutions were reorganized or bought out by other companies over the last few months. It has certainly been quite a year in the finance world, hasn’t it? But there are still plenty of lenders offering refinancing loans today. Which one is the best option for you, I cannot say. But I might be able to help you define the best lender for a home refinance loan might look like. It really comes down to the following:

You want to choose a reputable lender that has been around for a while. A well-known company, in other words.

You want to go with a lender that can offer you a good interest rate on your home refinancing loan.

You want choose a company that is not currently in financial trouble, or at risk of bankruptcy. Obviously, you don’t have a crystal ball to gave into the future. But with a little online research, you can find out which lenders are at risk of financial failure, and you can give your home refinancing business to somebody else.

Get Refinancing Offers from Multiple Lenders

Generally speaking, the fastest way to find the best offer is to solicit offers from more than one lender at once. This is where the Internet makes life easier for you. For example, on the refinancing quotes page of our main website, you cannot request multiple quotes through LendingTree — one of the best lender / refinancing websites around, in my humble opinion.

Once you receive information from various lenders through this process, you can then review the offers to see which one makes the most sense. Keep in mind, however, that the initial offer is only based on a cursory review of your financial situation. So you’ll still have to go through the full qualification process, just like you did when you got your original home loan. But this process will at least get the ball rolling in the right direction, and it might help you find the best lender for a home refinancing loan fairly quickly.

It can be confusing, so let me try to clear some things up for you. Yes, it is a good time to refinance a home loan … if you’re qualified to do so.

I just saw yesterday that the interest rates on a 30-year fixed-rate mortgage loan dropped below 6% over the last few days. That’s a really good interest rate, and it’s the lowest since February of this year.

Why does this make it a good time for refinancing a home loan? Well, if you are paying a much higher interest rate than the 6% prime rate, and you can qualify for a refinance loan with a rate that low, you could stand to save a lot of money over the life of the new mortgage.

Of course, you would have to run the numbers first, to see if the money you save would exceed the money you would spend in closing costs. But you get the idea. That’s why you’ve been hearing it’s a good time for mortgage refinancing right now.

Now for the other side of your question.

The reason you hear that some homeowners are unable to refinance their homes — the biggest reason, at least — is that a lot of people are “under water” with their mortgages right now. This means they owe more than their homes are worth, which makes refinancing nearly impossible. This is especially the case in cities were home values had been skyrocketing over the last few years (think California and Florida), followed by a sharp decline in values.

So while it sounds confusing and conflicting, it’s true. It is a good time to refinance a mortgage loan right now … if you’re a qualified candidate. But many homeowners are unable to get a refi loan right now, due to their property values.

But how does this process work? How can a homeowner refinance to stop a foreclosure process? And what types of obstacles are there, due to the current economic crisis.

These are the questions we will examine in this blog entry. Let’s take them one at a time:

How Can You Refinance to Stop Foreclosure

Many of the people who are at risk of being foreclosed upon have adjustable-rate mortgage loans (ARMs) that will adjust in the near future. Of those folks, a large percentage came into their ARM loans with bad credit. The lender offered them a low “teaser rate” and, in many cases, downplayed the risk associated with future interest rate increases.

We know the rest of the story. Millions of these homeowners had “payment shock” when their loans reset to much higher rates — and that, more than anything else, is what has fueled these record-breaking foreclosure rates across the U.S.

This is one of primary reasons so many people are refinancing their mortgage loans right now (or at least trying to). In many cases, it’s a desperate attempt to avoid foreclosure on their home, resulting from an enlarged mortgage payment. If a homeowner can refinance to a more affordable loan with a fixed interest rate, they could prevent this kind of payment shock and therefore stop the foreclosure process before it starts.

Refinancing Roadblocks You May Face

Refinancing to avoid a possible foreclosure sounds like a great idea, in theory. But in practice, it may not always work. Homeowners who want to refinance their mortgage loans face unique challenges right now, as a result of our troubled economy.

For one thing, house values have dropped in many areas of the country. In places like California, where the values may have been artificially inflated to begin with, they fell significantly. This can make it hard to refinance your home, because you cannot replace a bigger loan with a smaller one. In other words, a lender cannot offer refinancing terms that replace your current mortgage loan if your home value has dropped below the amount you still owe.

So in this scenario, we have a double-edged sword. The homeowner tries to refinance to avoid a possible foreclosure on the home, but the depressed property value makes it hard to do. For people in this situation, there is very little advice I can offer. But there may be a ray of light for you, in the form of a new FHA program for at-risk homeowners.

The Federal Housing Administration (FHA) has a new program called Hope for Homeowners, or H4H for short. This program is designed to help people avoid foreclosure by refinancing out of an ARM loan and into a more affordable fixed-rate mortgage loan. The new program just went into effect this month, October 1st to be exact. It goes until September 2011. They have some specific qualification criteria, though, so it’s not available to everyone trying to refinance their homes. You can find out if your qualified for the program by clicking the “Quotes” tab at the top of this blog, and then looking for the FHA link.

So what are the steps to refinancing a home mortgage? Well, if you ask 20 different mortgage folks this question, you’ll probably get 20 variations on a theme. In truth, you could start with a number of different steps to achieve the same end result. But let’s keep things simple, shall we.

Here is a good overview of the steps to refinancing your home loan. While you may not go through the process in this exact manner, it will at least give you a better understanding of what to expect.

Home Mortgage Refinance - Step by Step

• Step 1 - Review your credit reports and scores. For many people, the point of refinancing a home mortgage is to take advantage of lower interest rates. The market will partly determine what rate you get on the new loan, but your credit score plays a major role as well. You can start this important step by visiting the Tools section of this blog.
• Step 2 - Choose a home mortgage refinance lender. Some lenders only offer financing for the purchase of a home. Some lenders provide refinance loans and regular home loans as well. Other lenders specialize in mortgage refinance services. My advice is to go with a trusted name in this industry, which is why we recommend LendingTree (see link above). Learn more about the important step of choosing a lender.
• Step 3 - Get quotes and estimated closings costs from your chosen lender(s). Before you take any further steps in the refinancing process, you must determine if a mortgage refi even makes sense in your current financial situation. To do that, you’ll need to know what kind of interest rates a lender is willing to offer you, as well as an estimate of the closing costs on the refinance loan.
• Step 4 - Determine your break-even point (BEP). This is one of the most important steps to refinancing a home mortgage loan, because it will help you determine if you should pursue a refi in the first place. In some situations, it doesn’t make sense to refinance because the amount paid (in closing costs) will exceed the amount saved (from the lower rate). Learn more about the break even point.

Is this a simplified version of the process? Of course it is. Are there more refinancing steps than those listed above? Sure there are. In fact, entire books have been written about the refinance process, and the many steps involved with it. But that’s not the point of this blog post.

The point here is simply to get you thinking about the key steps to a mortgage refinance — checking your credit, shopping for a lender, obtaining quotes, and determining your break-even point and potential savings. Good luck with your refinancing process!

Many people feel the same nervousness about home refinance loans. Granted, homeowners are typically more educated about home financing than first-time home buyers are. But even so, the process of home refinance can be intimidating if you’ve never been through it before.

The key, then, is to learn about home refinance from all angles. Once you learn the basics, you will know (A) whether or not refinancing is a good idea for you, (B) how to move forward with the process, and (C) how to get the best rates on your new home loan.

And what better place to start than with home refinance terminology?

Learning Home Refinance Terminology

We have a variety of resources on this website to help you learn about the “lingo” of the home refinancing world. Simply by perusing the many articles on our website, you can get a feel for the concepts and terminology associated with the home refinance process. We also have a glossary of general mortgage terms you can use.

An example of a commonly used term related to home refinancing is the “break-even point.” Not only is this a common phrase in the industry, but it’s also a key concept you must understand before you pursue a home refinance loan in the first place. The break-even point refers to the point at which it makes sense for you to finance your home mortgage. It is when the money you save (by paying lower interest on the new loan) exceeds the money you spend (for closing costs on the new loan).

You can learn more about the break-even point (BEP) from this explanation of refinancing costs.

Remember, you must learn everything you can about the home refinance process before venturing into it. And terminology is a great place to start. In addition to using this website, seek out other sites that provide glossaries related to mortgage refinancing and similar topics.

Instead of fixing their credit situation, some people try to pursue refinancing as a solution. They look for ways to lower their interest rate (and thus their mortgage payments) through a so-called bad credit refinancing loan.

But my question is … isn’t this a bit of an oxymoron? A contradiction in terms? In other words, does it even make sense to try and refinance a mortgage loan when you still have a bad credit score? You’ll just end up in the same situation, with a ridiculously high interest rate piled on top of your monthly payments.

As with anything else in real estate, these questions can only be answered on a case-by-case basis. But in general, a bad credit refinance is a bad idea. One of the primary reasons homeowners seek refinancing is to secure a lower interest rate on the new loan — and, by extension, to save money over the life of the new loan. Generally speaking, there are two ways you can get a lower interest rate on a new mortgage loan: (A) take advantage of a drop in the prime interest rate, or (B) take advantage of your newly improve credit score to negotiate a lower rate on the new loan.

Fix Credit First - Refinance Second

You can probably see why I think the bad credit refinancing is something of a quandary. If you are planning to do a refi, but you still have bad credit (as compared to the national average), then option ‘B’ above is not really an option for you. In that case the only way for your bad credit refinance to be worthwhile is if the prime interest rate had dropped considerably.

If you apply for refinancing with a bad credit score still “haunting” you, then you will still be viewed as a subprime borrower in the eyes of most mortgage lenders. Thus, they will still charge you a much higher interest rate on the new loan than they would charge a borrower with good credit.

So whenever somebody asks me about bad credit mortgage refinance as a financial option, I usually tell them to focus on improving their credit before trying to refinance the loan. That way, you can secure a lower interest rate (in most cases) and make your mortgage refinance worthwhile.

Let’s start off by revisiting the all-important rule of refinancing success. If the money you pay to refinance your mortgage (the closing costs associated with it) exceeds the money you save over the term of the new loan, then it doesn’t make any sense to refinance the loan. This is where calculators come into the picture.

How to Use a Refi Calculator

A mortgage refinance calculator can help you run the numbers to see where you’ll come out after the refi. More specifically, it will help you compare your current mortgage payments to your new payments after refinancing the loan. You can then compare your savings to what you might expect to pay in closing costs, to see if the refi makes sense.

That’s why I always tell people to start the research process by using a refinance calculator to calculate the savings (or the lack thereof). The question is, where do you find the best calculators … or does such a thing even exist?

Here’s my advice to you. I wouldn’t rely on just one refinance calculator. I would bookmark two or three of them and use them all to validate one another. It’s kind of like using a scale to weight something. How do you really know if the scale is accurate? You don’t, unless you compare it against others to validate the reading. You can do the same thing with mortgage calculators, and I highly encourage you to do so. So instead of searching high and low for the best refinance calculator (and wearing yourself out in the process), just find two or three decent calculators and use them all.

Here’s a list of websites to get you started:

• www.mortgage-calc.com/mortgagerefinancing/
• www.lendingtree.com/mortgage-refinance/calculators/
• www.quickenloans.com/mortgage-calculator/refinance
• www.bankrate.com/calculators/mortgages/refinance-calculator.aspx

Even More Refinance Advice

I hope these calculators help with your refinance research. If you would like to learn more about this topic, be sure to check out the main refinancing section of our website. You can find dozens of helpful articles, tools and more. Good luck.