Refinancing your mortgage to take advantage of low interest rates may reduce your monthly payments substantially and help you save tens of thousands of dollars over time. You may also be able to change the term of your loan, switch from an adjustable to a fixed interest rate or use a cash-out refinance to access money that you can use to finance home repairs or to pay off other debts.
How Your Income and Debt Can Affect Your Refinance Application
To calculate your debt-to-income ratio, the lender will add up your monthly auto, student and personal loan payments; minimum credit card payments; and any child support or alimony payments you make. The lender will then divide your monthly debt payments by your monthly income and convert it to a percentage.
The guidelines on DTI ratios may vary somewhat from one lender to another. If your income is too low, or if you have experienced a pay cut or your hours were reduced, that may make your debt-to-income ratio too high to meet your lender’s guidelines. In that case, you may be able to qualify for a refinance by paying down your debts. A lender may allow a higher DTI in some circumstances.
Forms of Income You Can Include in Your Application
If you earn a salary or you get paid hourly, you will have to supply current pay stubs and past W-2s. If you receive income from overtime or commission, or if you have recently gotten a raise, you will have to provide supporting documentation. Other forms of income, such as Social Security payments, rental property income, investment income, alimony, royalties, foster care payments and boarder income may also be counted.
How a Lender Will Look at Your Income and Employment
Lenders will also want to make sure that your income has been stable or rising. If your income fluctuates because a large percentage of your earnings comes from commission or because you are self-employed, a lender may approve your refinance application if your average income gives you a DTI ratio that meets the lender’s guidelines. If you are self-employed, you may need to include additional income and profit documentation with your mortgage refinance application.
For lenders, stable employment is also important. You may have difficulty qualifying for a refinance if you have had a period of unemployment or if you recently took a new job in a completely different field because things may not work out in your new line of work.
Compare Terms From Different Lenders
Lenders may look at the same numbers, but they have their own guidelines for homeowners who want to refinance. Even though one lender denied your application, another may approve it. Two lenders that approved your applications may quote you different interest rates. Shop around for the best terms available.