If you want to refinance your mortgage, you have to have your financial affairs in order. Just like when you bought your home, your lender will look at your credit score, income, debts, and assets. They want to know that you can reasonably afford the loan before giving it to you.
So what should you do if you have other outstanding debts aside from your mortgage? Keep reading to find out.
Pay Your Debts on Time
First and foremost, pay your bills on time. Don’t pay your credit cards, personal loans, car loans, or student loans late. If you do miss a due date, get the debt paid immediately. Don’t let them go past 30 days late or your credit score will pay the price. If your credit score drops, it could affect your ability to refinance your mortgage.
Keep Your Debts to a Minimum
Just like when you purchased the home, your lender will calculate your debt-to-income ratio. They want to know how much of your monthly income is already allocated to current debts. If you have the ability to do so, pay your debts off in full before you apply to refinance. This could increase your chances of refinancing.
If you can’t afford to pay your debts off in full, at least pay them down as much as you can. This mostly pertains to revolving debt. Lenders don’t like to see large credit card balances. Rather than making the minimum payments, pay as much as you can on the debt in order to keep your debt ratio as low as possible.
Don’t Apply for New Debt
Lenders don’t just look at your current debts on your credit report. They also look to see if there are any recent inquiries on your credit report. Inquiries mean that someone else pulled your credit and it could only be with your approval. This means that you likely applied for new credit.
If there are new inquiries, your lender will ask about the inquiries. They will also ask for proof that there isn’t a debt that resulted from the inquiry, if you say that is the case. If you did take on new debt, the lender will need the details on it to make sure that your debt ratio still fits within the needs of the loan program. It’s best if you just don’t apply for new credit when you are nearing the loan application process.
Think About Consolidating Your Debts
If you have a large number of debts outstanding, you may consider rolling them into your mortgage. If you have the equity in your home, you can use it to get yourself out of debt. Of course, you need to have enough willpower to avoid getting back into debt in order to make this work. If you will just rack the debt up again, it won’t do you any good.
Each loan program has its own requirements regarding how much you can take out with a cash-out refinance to roll your debts into the loan. The maximum LTVs are as follows:
- Conventional – 80% LTV
- FHA – 85%
- VA – 100%
You’ll need to figure out how much your outstanding mortgage is compared to your home’s current value and then see how much of your consumer debt will fit into that amount to ensure that you are able to meet the requirements.
Obviously, the best thing to do is not have consumer debt at all, but that’s just not the reality today. Most consumers have some type of debt. Knowing how to manage it responsibly is the best way to ensure that you can refinance your loan, whether it’s to lower your rate or tap into your home’s equity.