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2 Mortgage refinancing
If you are in the processing of mortgage refinancing, you can improve your interest rate by cleaning up your credit and reducing your debts. Any type of legally enforceable recurring debt may be counted toward your debt ratio; the greater your debts, the more of a risk you are and the higher your mortgage rate will be. Here are several tips to help you minimize your disqualifying debt when mortgage refinancing and qualify for a better interest rate.
Mortgage Refinancing: What Debts to Count, What to Leave Out
When calculating your total debt ratio, you lender usually divides your bills into two types. These include installment debt like your car, boat, student loans, and medical bills, and revolving accounts like credit cards or any open credit lines like a department store charge account. Most lenders ignore bills you pay for installment debt that are scheduled to be paid off within 6 or 10 months after the date you apply for mortgage refinancing. If you lease your vehicle those payments will still count against you.
You do get a break on your revolving debt. If you routinely pay several hundred dollars more than the minimum amount due each month, many mortgage lenders only count your payment as five percent of your outstanding balance. When mortgage refinancing you will need to prove your qualifying income, you can also improve your application by documenting your debts. This will help the qualifying ratios your lender uses when evaluating your application for mortgage refinancing. Here are several tips to minimize your disqualifying debt.
I. Consolidate Your Credit Cards - One payment of $400 each month will hurt you less than four payments of $100; however, don't close the accounts you consolidate and run up the balance on one. Credit scores don't like high balances near your card limits.
II. Pay Down Your Debts - If you have installment accounts with less than 12 months to go, consider paying two-three months in advance. That pushes these debts off the lender's radar and significantly improves your qualifying ratios.
III. Avoid New Debts - No matter how tempting it may be, avoid making any purchases with credit prior to applying for mortgage refinancing. Your credit score will suffer if you do, and you're much better off waiting until after you've completed mortgage refinancing.
These tips are especially useful if your qualifying ratios are near or exceed the mortgage lenders limits for total debt, or if your credit score is less than 700. Having the smallest possible debt profile helps offset problems with your credit.
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