Were you the victim of the Great Recession? Do you now find yourself underemployed and making less than you were just several years ago? If you answered yes to either of these questions or if you have seen your income drop for any other reason, you might have thought about refinancing your home. However, you could hit a roadblock.
Why get a new mortgage
The biggest reason to get a new mortgage is because of today’s mortgage interest rates. We heard one radio commercial recently that said anyone whose mortgage had an interest rate of 4.75% or higher should do a refi. It’s also expected that mortgage rates will rise between now and the end of the year, making this a good time to get that new mortgage. However, you could run into a roadblock. Because you’re now earning less, the bank or mortgage company could see you as not earning enough money to qualify for a refi.
Find a lender willing to consider other factors
While you may be turned down by some lenders, if you persevere you should be able to find a banker that would be willing to consider other factors in your life such as the Social Security benefits you will be receiving. If you can get the loan’s underwriter to understand all of your financial facts, you might be able to get a 30-year fixed mortgage with an interest rate as good as 3.5%. This could save you literally hundreds of dollars a month. In addition, here are four things you could do to improve your chances of getting that new money-saving loan.
There is literally nothing that can stop you from getting a good refi faster then a not-so-good credit score. You’re entitled to one free credit report a year from the three credit reporting bureaus and you should definitely get yours. Review it carefully, looking for errors that might be affecting your credit score. If you find some, be sure to dispute them. All three of the credit-reporting bureaus have online forms just for this purpose. Also, review your use of credit cards and credit card debt. Most lenders want to see that you have a credit card balance that’s under 50% of your credit limit. This is called your debt-to-credit ratio. You can calculate yours by dividing your credit card debt by your total credit card limits. If you find it’s at 50% or higher, you could make a quick fix by paying down some of that debt. Alternately, you could ask your credit card companies to bump up your limits. However, don’t use the money. Just let it sit there to improve your score.
Choose your lender wisely
Your local bank branches are probably not the best place to go for a refi. Talk to real estate agents and friends and compare rate quotes from several different mortgage banks and credit unions. Be sure to ask about turnaround times and make sure your loan officer is knowledgeable and responsive. If you go to a mortgage banker that loans its own money, it can be easier to deal with than a traditional bank. It’s also much better than going to a mortgage broker who is basically just a salesman.
Get your documents in order
You will probably need to have ready several months of bank statements so that your lenders can do what’s called an account audit. They will want to see your inflow or the amount of money that’s coming into your account each month. If you have large unsourced deposits such as a birthday check from your rich aunt, be ready to explain that. You will also need to have your tax returns on hand. If you are self-employed, Fannie Mae has mandated that you show two years of returns. And Fannie’s younger brother, Freddie Mac requires at least one year of returns.
Tweak the terms
If you will be dragging a mortgage into your retirement, you need to be careful because those monthly payments could swiftly erode your savings. However, if you’ve got 20 years to go on a mortgage that has a relatively high interest rate then refinancing to a new 30-year loan could significantly lower your monthly payments and free up money you could save for that retirement. You might also think about moving from a 30-year to a 15- or 20-year loan. Just make sure that you can afford a larger payment.
What to do if you’re underwater
If you were victimized by the great housing meltdown of 2007, you may owe more on your home than it’s worth. But don’t despair. You could still get a refi. The government’s Homeowners Affordable Refinancing Program (HARP) could help you get a refi if your mortgage is owned or guaranteed by either Fannie Mae or Freddie Mac ( or sold to Fannie Mae or Freddie Mac on or before May 31, 2009) and you are current on your mortgage payments. A HARP loan should also have a lower interest rate than your current interest rate and will have a fixed term.
More tips for getting a mortgage
Tip 1: Stop dawdling and refinance – interest rates are still at an almost all-time low
Tip 2: Buyers, get going – this is still a great time to buy a house
Tip 3: Check out an FHA vs. conventional loan
Tip 4: Make sure that your credit is golden
Tip 5: If you’re underwater, don’t take ‘no’ for an answer
Tip 6: Give your lender a chance – there are programs available if you’re struggling to make your payments
Tip 7: If you’re approved for a mortgage, leave your credit alone – most lenders will order a second credit report a few days before your closing
Tip 10: Understand that it’s not over until the loan closes
If you’d like to understand more about HARP, here is a video with five things you should know.