Deborah Laemmerhirt 203-994-4297 HomesinConnecticutforsale.com
There’s no question that the real estate market is tough right now. Because lenders have significantly tightened their standards in recent months, refinancing is difficult these days — especially if you have little equity, low income, poor credit or large amounts of debt.
Fortunately, if you’re stretched financially thin right now and want to refinance your mortgage to a better rate, there are some options available to you.
Here are the three most common refinancing obstacles as well as the most effective ways to overcome them.
Obstacle #1: Lack of Equity
Inadequate or negative equity is probably the most common refinancing problem in the book. When lenders decide whether or not to offer you a loan, they factor your equity into their loan-to-value (LTV) ratio. Most lenders require an LTV of at least 80 percent before they’ll approve you for a loan.
You will probably be assigned a low LTV ratio if:
- You bought your home with no down payment.
- You took an interest-only or payment-option mortgage.
- You refinanced your original mortgage to get cash.
- Tour home value has plummeted.
How to Overcome This Obstacle: Reduce Your Principal
If you have a low LTV ratio, you may want to lower your loan amount. This may hike up your LTV enough so you’ll be approved for a loan. To lower your loan amount, you can pay a lump-sum payment or a gradual reduction of principal — or both. If you have extra funds to apply, say, $300 to $500 a month toward your principal each month, you will greatly lower principal and the interest that’s being charged on your outstanding principal.
You may consider withdrawing money from a savings or retirement account, selling another asset or using an income tax refund or job bonus. Of course, by tapping into these assets, you are losing any income that may have been earned from these investments. It’s extremely important to evaluate your overall financial situation before making such a major move. Discuss your options with a financial advisor. A professional can help you determine what makes the most sense for your unique situation.
Obstacle #2: Low Income/ High Debt
If you earn little income and/or carry a significant amount of debt, you may have what’s considered a high debt-to-income (DTI) ratio. Lenders factor in both your income and debt to calculate your DTI ratio, and the resulting number plays a major role in determining whether or not you’ll be approved for a loan. After all, lenders want to make sure that you have enough income to make your mortgage payments on time each month.
If you are self-employed, have recently lost your job, overstated your income on your original loan application or carry excessive amounts of debt, you probably have a high DTI ratio. The higher your DTI ratio, the higher the risk you are to a lender-and the less likely you’ll be approved for a refinance loan.
Lenders typically want your DTI to be no more than 38 percent. That means your debt should equal no more than 38 percent of your income. However, this is just a general rule of thumb because DTI ratio standards vary from lender to lender.
How to Overcome This Obstacle: Raise Income, Lower Debt
The solution to a high DTI is obvious: earn more income and pay off your debt. Of course, this is much easier said than done. However, if you want to refinance your home badly enough, you can make it happen.
You can earn more income by asking for a salary increase, switching to a higher-paying job or taking on a second job. However, your second job must be considered a “stable permanent position” for it to count toward your DTI ratio. Most lenders require that you work in a position for two years before they consider it a “permanent” job.
Additionally, if you can qualify for an FHA-insured loan, you may be able to add a non-occupant co-signer (such as a parent) to your loan application. Your co-signer’s income will be added to the equation-but remember, their debts will count toward your overall DTI ratio, as well.
You may also consider documenting other sources of income, such as annual bonuses, limited partnership payouts and any rent money you may earn. Although documenting and explaining these other sources of income may be a challenge, it could be well worth the extra effort. After all, these other sources of income could greatly benefit your DTI ratio.
If your DTI ratio is high because you have excessive debt, you should focus on paying off those debts. Some financial experts say if you’re looking to refinance, it may even be worth spending your savings to pay off debts. For example, if you owe $4,000 on a car loan, and you have $5,000 of extra funds in the bank, consider using that money to pay off the car loan. This could greatly reduce your DTI ratio. Of course, if you are carrying any high-interest credit card debt, you should pay that down first.
Obstacle #3: Poor Credit History
Your credit score is calculated based on your credit history, including whether or not you pay your bills on time, how much debt you’re carrying and how well you handle your financial obligations. If your credit score is low, lenders will see you as a high risk.
In the past, many lenders overlooked a low credit score, but things have changed. If you have a low credit score, you may be able to refinance, although the interest rate may not be low enough for it to be worth your while.
How to Overcome This Obstacle: Improve Your Credit
The most effective way to hike up a low credit score is simply to pay your bills in full and on time. Of course, it will take at least six months before this good financial behavior will show up in your credit score. If you find errors in your credit report that are negatively affecting your score, call the credit bureaus and challenge this information.
Deborah Laemmerhirt 203-994-4297 HomesinConnecticutforsale.com
As people age, it becomes clear that in terms of housing, one size does not fit all. The majority of older Americans say they prefer to remain independent in familiar surroundings, but that often means some adjustments must be made to their homes.
Doorways may have to be widened to admit walkers and wheelchairs. Ramps may have to be added and in some cases, private elevators installed. Aware of these special needs, the housing industry has responded by developing a new specialty in remodeling: renovating for accessibility and age.
Thinking ahead to what your needs might be in the future can mean the difference between staying in your home or moving to a group living facility. The National Association of Home Builders suggests doing a room-by-room assessment of your home, evaluating it for areas that may present problems now or later.
Are all of the key rooms accessible and maneuverable for a person with limited walking or standing ability?
If you were confined to a wheelchair, are countertops, cabinets, and cooking controls easily reachable?
What about light switches, receptacles, thermostats, and fire alarms?
Is the bathroom fitted with special equipment such as grab bars and lowered towel racks?
Are floors made of non-slip materials?
Don’t Overlook the Outside
You may also want to look around outside your home to see how, with some modifications, you can make it as low maintenance as possible.
If you have a large lawn that needs frequent cutting, a landscaper may be able to suggest some changes such as ground cover or other attractive designs that require less work to keep them looking manicured. Slopes can be minimized and steps eliminated, or supplemented with nearby ramps and handrails.
If you regularly paint the exterior of your home, you may want to install vinyl siding and trim that require less attention. Decks and fences can also be converted to vinyl for easy maintenance. For homeowners with limited mobility, access to favorite places like gardens, decks, and even swimming pools can be made easier by thinking ahead.
The National Association of Home Builders recommends that if you need to improve the maneuverability of your home, consider hiring a Certified Aging-in-Place Specialist. These professionals are trained not only in common remodeling projects, but in meeting the unique needs of older people who want to stay in their homes. They receive certification from the National Association of Home Builders and are required to maintain their expertise through continuing education.
Here are some questions to ask when planning to modify your home:
Do I want to add a bathroom and possibly a bedroom to the main level?
How can I make the kitchen more functional and accessible?
Are there improvements that can help prevent falls?
How much money can I budget for these projects?
Can I use a home equity loan?
To locate a Certified Aging-in-Place Specialist, you can look under “remodel” in the yellow pages or click here.
Before embarking on a remodeling project to make your home more accessible, first ask yourself how long you want to remain in the house. If this is the place you want to spend your later years, evaluate your home to help make it comfortable for as long as possible.
Not all projects require a contractor. There are changes you can make yourself, or with a little help, that can improve access, comfort and safety:
Install visual fire alarms.
Replace doorknobs with levers that only need to be pushed to operate.
Replace light switches and thermostats with remote controls.
Install grab bars in the bathroom.
Place night lights in dark passages.
Install an automatic garage door opener.
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