by Maurie Backman | Feb. 2, 2021
Want to get a new mortgage? These seemingly innocent moves could cost you that opportunity.
There's a reason so many homeowners have been rushing to refinance their mortgages lately. Refinance rates are sitting near historic lows, so if you apply for a new home loan, there's a good chance you'll snag a much lower interest rate than what you're currently paying. The result? You could lower your monthly housing costs substantially.
But if you're going to apply to refinance your mortgage, there are certain pitfalls you should avoid along the way. Here are a few moves you shouldn't make if you're planning to refinance soon.
The lower your debt-to-income ratio (DTI), the more likely you'll be to get approved for a refinance. Your DTI measures your monthly debt payments relative to your wages, and taking on a new loan will drive that ratio up. You're better off waiting to apply for a new loan -- even a smaller one -- until you've closed on your refinance.
Mortgage lenders like to see a solid work history from applicants. As such, if you switch jobs right before applying, it could make lenders less comfortable giving you a home loan. After all, if you're new to your job, who's to say it will work out or that the position is stable? If you have the option to delay a new job offer until after you refinance, do it. The only exception is if you're currently underemployed and have an opportunity to take on a full-time job at a higher salary. In that case, getting a new job could actually make you a more attractive mortgage candidate.
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Many people can't afford a large purchase outright, whether it's a car, furniture, or electronics, so they finance it instead. But if you go that route, it'll drive up your DTI too. Even if you can pay for your purchase outright, your lender is likely to ask to review several months of bank account statements before agreeing to loan you money. If that lender sees that you've taken out a large chunk of cash, it may question whether you're a responsible spender. Or, it may not take kindly to you now having less money on hand to pay your mortgage in the event you lose your job. It's for these reasons that you're better off delaying a large purchase until after your refinance is complete.
Many borrowers think that since they already have a mortgage, swapping it out for a new one will be a breeze. But remember, having a mortgage doesn't guarantee you'll qualify to refinance. Lenders will look at a number of factors, from your credit score to your existing debt to your income and cash reserves, when making that determination. If you want to increase your chances of getting to refinance at today's great rates, avoid the above moves, or at least put them off until your home loan is already in place.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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