Now that interest rates are at their historical lows, many homeowners are exploring the possibility of getting a refinance. By refinancing your existing mortgage, you can enjoy today’s low interest rates.
It is true that current mortgage rates are pretty low; still getting a refinance is tougher than you think. Thanks to the refinance boom, lenders get numerous applications every day and consequently, they have become quite selective. However, you can improve your chances of getting a refinance by avoiding these common mistakes that borrowers often commit.
Don’t forget to get a rate quote from your current lender
While shopping for a refinance, start with your current lender. If you already have a good relationship with them and your repayment history is good, they will definitely want to retain your business. If you are getting refinance from your current lender, the underwriting process will be relatively simple and hence you can get a speedy approval.
Even if you aren’t happy with the service offered by your lender, you should still ask for a quote. You can use it to compare mortgage rates offered by other lenders.
Having too many expenses and too little income
While processing your application, the lender will definitely want to make an assessment of your monthly income and expenses. If you are already in debt, the lender may assume that you will not have enough cash to make your monthly mortgage payments. As a result, your refinance application can get rejected. In fact, this can happen even if the EMI on your refinanced mortgage will be lower than the EMI you currently pay. So, what to do? There is only one solution. You should pay off your outstanding loans and debts before applying for refinance. You can perhaps borrow money from your relatives and pay off some of the loans.
Don’t use up your credit
One of the factors they consider while calculating your credit score is the difference between your total credit and the credit you actually use. So, if the credit line on your credit card touches $25,000 and you have used all of that, the lender is unlikely to approve your refinance application.
On the other hand, if you have only used $5,000 of your $25,000 credit, your situation looks quite normal. If it is possible, pay off your credit card debts before getting a refinance.
Don’t make big purchases before your refinance application gets approved
Don’t make big purchases immediately after you apply for refinance. You can buy whatever you want using your savings, but avoid buying stuff using your credit card. If you add any new debts, your financial situation will change for the worse and the lender may reject your application.
Don’t leave remodeling projects unfinished
Make sure that you have finished all remodeling projects you undertook. The lender will send an appraiser to assess the value of your property and if the appraiser notices unfinished remodeling projects, the lender may reject your application.
The lender will want to sell your property if you fail to make your mortgage payment. If your home is an unfinished project, they are unlikely to get a good price at a foreclosure sale.