The new mortgage rate trend that followed last week’s phenomenal hike breaking Brexit’s 11-week low rate streakmay have sent many buyers locking in on rates before the new trend gets comfortable in its new course. For those who are considering refinancing, the time may be ripe to get started with your refinancing journey. But how ready are you to undertake the whole remortgage process?
This article discusses the most common challenges you might encounter when in the initial process of refinancing your home or property. We also included some tips on how you can overcome them in honest, smart, and practical ways.
The Problem: Bad Credit Profile
You have gone through the whole mortgage process before and are aware of the importance of a healthy credit reputation. Lenders can’t just rely on word of mouth to know how responsible you are as a credit holder. Instead, they look at your credit history and use your credit score to quantify your potential to repay them for the loan you are asking.
So let’s say you have lost your job and had difficulty paying your bills on time in the near past. This hurt your credit record and resulted to your current low credit standing. Will you still be okay to refinance?
The best you can do in this situation is to wait and change your financial management habits. Pay bills whenever they are due and be diligent. That is if you are aiming for better refinancing deals.
For credit scores lower than 620, you may have limited chances of finding a good refinancing option. But that does not mean there aren’t any. Shop around for refi options for underwater mortgages.
Another alternative in this scenario is to try to negotiate with your collection agencies or creditors to delete the delinquent record by asking for a deletion letter. This document is proof that you have responsibly paid the credit in question fully and that the negative item should now be removed from your credit records. After this, you can ask for a rescore.
The Problem: Your LTV Ratio is Too High
Most lenders cap a limit of 80 percent in LTV ratio to refinance. LTV ratio or loan-to-value ratio expresses the percentage of the property that is yours and the percentage that is owed. Calculate your LTVby determining the mortgage amount you owe on the property and divide it by the total amount of the property.
For example, you want to borrow or owe $160,000 for a property that costs $200,000. That means your LTV ratio is 80 percent. This is the common limit, although some lenders may render flexibility on their caps. If your LTV is higher, a good chunk of your lender options might rethink giving you a good deal.
But fret not. There are ways you can go around this hurdle. One is to reduce your principal by cashing in money via lump sum payments, by gradual reduction, or through both.
Another option is to look for a good refi alternative. If your loan is insured by the Federal Housing Administration, you can refinance through the agency’s FHA Streamline Refinance program. Also, consider HARP® or the Home Affordable Refinance Program® which allows refinancing to qualified borrowers without regard to his/her LTV ratio. And, if you are qualified, take advantage of VA’s Interest Rate Reduction Refinancing Loan (IRRRL)program.
The Problem: Not Enough Income; Too Much Debt
A borrower’s DTI ratio is one of the things lenders look into first during the initial process of mortgage refinancing. A DTI ratio or debt-to-income ratio tells the lender if you will have the income to pay the loan. The typical max for DTI is 38 percent and anything higher might result in the denial of an application.
How do you solve this? Get professional guidance.
The most practical advice is to earn more. Either you strive to get a higher-paying job or get a second one. If you go for the latter, make sure it is for a stable position since most lenders ask for a two-year track record before they consider a second job for the computation of the DTI ratio.
If you are diligent, document all sources of income that might count.
Pay your debts even if it might mean sacrificing your savings in the process. Know your priorities first before you invest.
Does any of these problems resonate with your current financial status? Evaluate your situation. Recognize existing problems so you can start early in working your way out and begin your refinancing journey with more confidence.
If you feel that you are ready for refinancing, don’t delay. Start while rates are low. Talk to a lender now!
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.