With record low mortgage rates it’s never been more affordable to refinance a home. While it may be suitable for some, consider your overall mortgage loan before making a definite choice. Refinancing isn’t always the best decision; nonetheless, if it makes sense, have at it! So if you decide to refinance, avoid these five costly mistakes.
The following tips were modified from a Yahoo!Homes’ article.
Tip #1 Don’t Open New Lines of Credit
Opening new lines of credit can be tempting, but be wary when planning to refinance. Avoid opening ANY type of credit once you’ve submitted mortgage paperwork because it can negatively affect the process and potentially ruin the possibility of a loan approval.
So next time you’re at the store, kindly reject the sales clerk’s credit deal and move along. As tempting as it can be, resist the urge.
Tip #2 Making Major Purchases
You’ve come to the conclusion that you will have supplementary income after refinancing your mortgage and decide to splurge on a big ticket item like a new car. Before you decide to sign off on a new car lease, consider your debt-to-income ratio.
The “acceptable limit” for a debt-to-income ratio varies between mortgage lenders. According to the Federal Housing Administration (FHA), 29 percent of your overall income is designated to housing costs, while 41 percent goes to supplementary housing expenses, and other long-term debt, including student loans, credit cards, home loans, etc.
In Yahoo!Homes’ article, Dave Rouse, president of Wisconsin Mortgage Bankers Association explains that the debt-to-income ratio shows mortgage lenders whether the borrower has a good balance of debt and money. Not having the right balance, may result in an increase of interest rates or the cancellation of your mortgage loan, says Rouse.
Tip #3 Changing Jobs Before Your Loan is in the Clear
Switching jobs while refinancing might change the likelihood of a loan approval. Experts suggest for you to hold off on your two weeks’ notice until lenders verify your employment—typically within three days of the closing date.
So before you decide to embark on a new job venture, make sure your mortgage loan is in the clear.
Tip #4 Making Large, Undocumented Deposits
Making large deposits to your personal accounts without proper documentation might stall your mortgage loan, states Herb Levin, owner of 1st Eagle Mortgage Inc. in a Yahoo!Homes’ article. Levin explains that any transaction with undocumented deposits might raise a red flag to the lender. He encourages borrowers to be honest about their personal finances and always provide proper documentation (i.e. a copy of a stock market receipt, bonus check stub, etc.) for deposits.
Tip #5 Overestimating Self-Employment Income
Being self-employed can be a great benefit, but it might also mean not having a steady income. When refinancing, accurately pinpoint your earnings—don’t overestimate or generalize your income.
Rouse suggests for borrowers to use their taxable income and provide all tax returns, W2 forms and pay stubs to their initial consultation with their lender.
Providing an exact income, can better identify the type of mortgage loan you can afford.
So before you decide to refinance, consider these helpful tips for a strenuous-free mortgage process.
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