Over the past several months, mortgage interest rates have begun creeping higher. It’s not too late to refinance to get a lower rate, but you need to move quickly, while rates are still in the 4-percent range.
Even though banks are in business to lend money, they aren’t making things easy for homeowners.
Before you walk through the front door of your local bank or credit union to seek a refi, here are some basic guidelines to help simplify the process:
INCOME. The borrowers’ combined gross monthly income needs to be approximately three times the new mortgage payment, including interest, principal, taxes and insurance. You will be required to verify this with tax returns. You will be breaking the law if the income on your loan is not substantiated by your income tax returns.
CREDIT REPORTS. Review your credit reports (get free copies at AnnualCreditReport.com), looking for incorrect information. Get all errors corrected using the dispute process (instructions will come with each report). You cannot remove correct information, even if it is negative. But you can make an explanation to the loan agent for old entries that happened years ago, before you got smart about money and credit.
FICO SCORE. While you have many credit scores, the one your lender is most likely to consider is your FICO score. You can get yours at myFico.com for about $15 each. Co-borrowers’ scores will be averaged to come up with one score for your refi. These days, mortgage lenders are looking for FICO scores of 680 and above just to qualify. Scores over 740 are considered good in today’s market; above 760 is golden. Under 720 will cost you; below 700 will become painfully expensive.
LOAN-TO-VALUE. Your loan-to-value is determined by dividing the loan amount by the appraised value of the home. For example, if you need to refinance $200,000 and your home is appraised for $400,000, your loan-to-value will be 50 percent ($200,000 / $400,000 = .50). This needs to be 80 percent or less to get the best deal.
DEBT RATIO. The bank wants to be sure you can afford to pay back what you borrow before they give you a loan. No more than about 38 percent of your income should go toward paying all of your debts, including your mortgage. Ideally, banks are looking for debt ratios under 20 percent, with 16-19 percent considered optimal.
SIT TIGHT. During the weeks and months that your refi is in escrow, make sure you do not take on any new debt or make any changes at all to the information on your loan application.
Assume that the lender will pull your credit reports and credit scores again right before funding your refinance to make sure nothing has changed.
While refinancing, your mortgage will not be simple, but dropping your interest rate will be worth the effort.
Mary Hunt is founder of www.DebtProofLiving.com.
You can email her at firstname.lastname@example.org, or write to Everyday Cheapskate, P.O. Box 2099, Cypress, CA 90630.
To find out more about Mary Hunt and read her past columns, please visit the Creators Syndicate Web page at www.creators.com.