With mortgage rates so low, many homeowners are considering refinancing. I shopped around and collected rate offers to refinance my mortgage (originated in 2016) in July. This shopping around is smart — it helped me find lenders willing to offer me better rates.
But by focusing on what lenders could offer me, I was missing a key part of the equation: how lenders would view my finances. I generally manage my money well, so I assumed I’d be well-qualified and get a great rate with no problems.
But how I view my financial management vs. how a lender views it? Those are two different things. And it turns out I was unprepared for some surprises I might have seen coming if I’d prepared a little better. Here’s what I wish I’d done before applying to avoid headaches during the refinancing process.
Analyze your creditworthiness
If I had a redo, I’d review my own finances when I first thought about refinancing. Taking this step could have helped me see and correct potential issues early — with a lot less stress and pressure.
So take a look at your finances to see if you’d be a good candidate for refinancing and decide if it’s a smart financial step for you. Here’s how:
- Get a free credit report and check for inaccurate information or errors
- Analyze your current credit score and factors affecting it to see if you can boost it
- Calculate your debt-to-income ratio to see if it’s favorable
- Review your income history for the past two years
- Research your local housing market and home value estimates to get an idea of what your home might appraise for
- What your new loan-to-value ratio might be and if you could refinance away PMI
Optimize finances ahead of applying
I had a nasty surprise: my credit score was lower than I’d expect. It wasn’t enough to derail the refinance entirely, but it did result in a higher rate — or pricey point buys if I chose to take that route.
I pulled my credit report to figure it out and was confused to see an unfamiliar delinquent account, opened in March. After calling the listed lender and reviewing the details of the account with a customer support rep, it became clear this was a fraudulent account. The rep helped me file an unauthorized account claim, and I left the call confident it would be removed from my credit reports.
As you get an idea of how lenders will view your financial situation and history, you might find ways to improve your creditworthiness in the near future. Here are some ideas:
- Put a hold on other debt accounts and credit applications to keep your credit and debt-to-income ratios (DTI) more favorable
- Dispute and correct inaccurate credit information, including fraudulent or unauthorized accounts
- Pay down credit card balances and keep them low to improve credit utilization ratio and DTI
- See if you could pay off a lower-balance debt to eliminate a monthly payment and improve your DTI
- Collect documents and information you might need to prove income, especially if your income is variable, you’ve had a job change, or you’re self-employed
Review recent income history
Your occupation and recent income is a big determinant in your refinancing application and new mortgage terms. Lenders look back two years to see your income and earning history. In other words, your mortgage underwriting won’t be based on your current job and pay alone, but your employment and earning history for the past two years.
So take a look at your income history and how a lender might view it. Are there any big changes in income that you’d need to explain, such as a period of unemployment or a drop in income? Did you switch industries or make a similar big career change?
For me, I moved from working for an employer to full-time freelancing in January 2019. I was aware this might throw a wrench into underwriting, as my income was harder to verify and I haven’t yet established two years of self-employment income.
Weigh a joint mortgage
Just because we had a joint mortgage in the first place didn’t mean our refinanced mortgage had to include me. With my husband’s excellent credit and steady, full-time job he qualified on his own.
But a joint mortgage with my messed-up credit would mean paying $5,000 more in points to get our desired rate than what my husband alone would pay, along with about $800 in additional fees. I considered other impacts of refinancing the mortgage in my husband’s name, too, to see if it made sense.
Refinancing a joint mortgage to a single borrower’s name can make sense in other cases, too. Maybe the spouse wants to be dropped off to help their DTI and qualify for other loans, such as student loans or business loans. Refinancing a joint mortgage can also be a way to remove an ex from a mortgage after a breakup.
Ask for a better deal
When the lender added a $550 appraisal fee to a joint mortgage that wouldn’t have applied if just my spouse applied, I wasn’t happy. So I asked if they could waive this fee even on a joint application. And I got a pleasantly surprising, “Sure!”
Not everything is negotiable on a home loan, but it’s okay to slow down and ask a lot of questions. Including things like, “Is there any way to lower my point buy?” or “Would it be possible to waive this fee?” Your lender might waive a fee or point you to an option that could lower your costs.
Final refinancing results: 1.5% lower rate and $400 in monthly savings
As the process progressed, the fraudulent account was removed from my report — and my score jumped by more than 100 points. We decided to continue with a joint mortgage. In fact, our final lending offer was a better deal than the original offer with just my husband on the loan.
In all, our new mortgage rate will be 1.5% lower. That new rate and our lower principal dropped our monthly loan costs by $400 and will save us over $50,000 over the life of the loan.
It worked out, but handling all these surprises during the refinancing process made it more complicated and stressful. Hopefully, you can learn from my experience and go into a mortgage refinance more prepared and informed for the process.