10
Dec
By Fred Gruber
Credit Scoring

Will Refinancing Impact Your Credit?

Refinancing a mortgage can provide significant financial benefits, such as lowering your interest rate or accessing home equity. However, it’s important to understand how the process may temporarily affect your credit score. Here’s an in-depth look at the potential short- and long-term effects of refinancing on your credit, along with tips for minimizing any negative impacts.

What Does It Mean to Refinance a Mortgage?

When you refinance, you replace your existing mortgage with a new loan. Homeowners refinance for a variety of reasons, including:

  • Lowering their interest rate
  • Changing the loan term (e.g., from 30 to 15 years or vice versa)
  • Accessing home equity through a cash-out refinance

There are two primary types of refinancing:

  • Rate-and-Term Refinance: Adjusts the loan’s interest rate, term, or both. For example, refinancing to a lower rate can reduce monthly payments, or switching to a shorter term can save on long-term interest costs.
  • Cash-Out Refinance: Lets homeowners borrow against their home equity, receiving the difference between the current loan balance and the new loan amount as cash. This option is commonly used for home improvements, debt consolidation, or large expenses.

How Does Refinancing Impact Your Credit?

Refinancing can have both short-term and long-term effects on your credit. While the short-term impacts are usually minor and temporary, it’s helpful to understand the details.

Short-Term Impacts

  1. Hard Credit Inquiries:
    When you apply for refinancing, lenders conduct a hard credit inquiry to assess your financial profile. This can temporarily lower your credit score by five to ten points. Multiple hard inquiries in a short time frame may have a larger impact, so it’s best to avoid shopping for other credit during this period.
  2. Credit Age:
    Refinancing creates a new loan account, which may lower the average age of your credit accounts—a factor in determining your score. If you don’t have other long-standing accounts, the impact may be more noticeable.
  3. Credit Utilization:
    If you choose a cash-out refinance, your total debt increases, which can raise your credit utilization ratio. This ratio is a key metric in calculating your credit score, so higher utilization can temporarily lower it.

Long-Term Benefits

Despite the initial dip, refinancing can improve your credit and financial health in the long run:

  1. On-Time Payments:
    Payment history is a major factor in your credit score. Regular, on-time payments on your new loan will strengthen your score over time and offset any short-term declines caused by the refinance process.
  2. Improved Debt-to-Income (DTI) Ratio:
    Refinancing to a lower interest rate reduces your monthly payments, freeing up income and improving your overall financial flexibility. While DTI isn’t part of your credit score, it’s an important factor for future loan approvals.
  3. Debt Consolidation with Cash-Out Refinance:
    Using a cash-out refinance to consolidate high-interest debts can lower your credit utilization ratio and boost your score. However, weigh the risks carefully, as this initially increases your total debt.

Avoid New Credit During Refinancing

Applying for additional credit, like a car loan or credit card—while refinancing can harm your credit score and disrupt the loan process. Lenders may view this as increasing your financial risk, which could jeopardize your approval.

While refinancing may result in a temporary dip in your credit score, the long-term financial benefits often outweigh these short-term effects. By understanding the process and managing your credit wisely, you can make the most of refinancing opportunities and position yourself for future financial success.

03
Dec
By Fred Gruber
Home Buyer Tips

Steps to Prepare for Future Home Financing and Year-End Financial Checklist

As the year draws to a close, it’s the perfect time to take a step back and review your financial health, especially if you plan to purchase a home next year. Whether you’re a first-time buyer or looking to upgrade, proper preparation can make all the difference when securing a mortgage with favorable terms. Here’s a comprehensive checklist to ensure you’re financially ready for home financing in the year ahead.

1. Review Your Credit Score

Your credit score is one of the most important factors lenders will consider when deciding whether to approve your mortgage application and what interest rate to offer. Obtain a copy of your credit report from the three major bureaus—Equifax, Experian, and TransUnion. If your score isn’t where you want it to be, take time to dispute any errors, pay down high-interest debt, and avoid missing payments as you head into the new year.

2. Save for a Down Payment

The more you can put down, the better your mortgage terms will likely be. Ideally, aim for at least 20% of the home’s purchase price to avoid paying private mortgage insurance (PMI). If saving 20% seems daunting, consider setting up automatic transfers to your savings account to stay on track. Every little bit adds up over time.

3. Evaluate Your Debt-to-Income (DTI) Ratio

Mortgage lenders closely examine your debt-to-income (DTI) ratio, which measures the amount of your income that goes toward monthly debt payments. Lower DTI ratios indicate to lenders that you’re more likely to manage your mortgage payments responsibly. If your DTI is high, focus on paying off existing debt to improve your chances of securing favorable loan terms.

4. Calculate Your Budget

Knowing how much home you can afford is essential. Use online mortgage calculators to estimate your monthly mortgage payments based on different home prices. Keep in mind that your mortgage payment should ideally not exceed 28% to 30% of your gross monthly income. Additionally, factor in other costs like property taxes, homeowners insurance, and home maintenance to avoid overextending your budget.

5. Check Your Savings for Closing Costs

In addition to your down payment, be prepared for closing costs, typically ranging from 2% to 5% of the home’s purchase price. These fees include appraisal costs, title insurance, and lender fees. Having extra savings set aside for these expenses will help you avoid delays when it’s time to close on your home.

6. Get Pre-Approved for a Mortgage

Before you start shopping for homes, getting pre-approved for a mortgage is a good idea. This process involves a lender evaluating your creditworthiness and financial situation to determine how much you can borrow. A pre-approval letter shows sellers that you’re a serious buyer and can give you a competitive edge in a hot market.

7. Set Financial Goals for the Year Ahead

Take time to review your financial goals and create a plan to reach them. Whether it’s saving more for your down payment or paying off existing debt, a clear plan will help you stay on track. Revisit your goals every few months to ensure you’re making steady progress toward homeownership.

Reach out by phone or email to discuss your plans. We can help you understand the latest loan options available, interest rates, and more to simplify the home-buying process and secure a loan that best fits your needs.

27
Nov
By Fred Gruber
Taxes

Why Tax Prep is Crucial for Mortgage Applicants

When you are preparing to buy a home, tax season should be on your radar as it plays a significant role in your mortgage application process. Whether you’re a first-time homebuyer or a seasoned investor, how you file your taxes can have a direct impact on the mortgage you qualify for. Understanding this connection can help streamline the process and potentially save you money on your loan.

How Tax Returns Impact Your Mortgage Application

The income reported on your tax returns is one of the most important factors in determining how much you can borrow for a home. For traditional mortgage loans, lenders typically rely on your reported net income (after deductions) to assess your ability to repay the loan. This means the way you file your taxes, including any deductions and write-offs, can significantly affect your borrowing power.

For example, if you are self-employed or earn income outside of a traditional salaried position, your tax returns will play a crucial role in assessing your qualifications. Let’s say your gross income for the year was $100,000, but you worked with your accountant to write off a substantial portion of that income for business expenses or other deductions. If those write-offs reduce your taxable income to $50,000, that’s the figure lenders will use to evaluate your eligibility for a loan.

It’s important to note that if your reported income is lower than you expected, alternative mortgage options, such as bank statement loans, may be available. These types of loans focus on your actual cash flow rather than relying solely on your tax returns. While bank statement loans may come with slightly higher interest rates or require a larger down payment, they could be a good option if your tax deductions are significant but you still want to access your home’s equity.

What If I Haven’t Filed My Taxes?

If you haven’t filed taxes, whether due to operating a cash-only business or another reason, you may still be able to qualify for a mortgage. There are alternative loan options such as bank statement loans or no-income-verification mortgages that do not require traditional tax documents. It’s essential to consult with a mortgage professional who understands your unique situation to determine which option is best for you.

What Do Lenders Look For on Your Tax Returns?

Lenders and underwriters closely examine specific line items on your tax returns to determine your ability to repay the loan. If you are self-employed, for instance, there are several expenses you may be able to add back to your net income to increase your qualifying amount. Here are some common items lenders adjust when reviewing your tax returns:

  • Net Profit or Loss (Schedule C): This is the starting point for determining your income. If it’s positive, it adds to your borrowing potential, while a negative figure may require additional documentation or justification.
  • Depreciation and Amortization: If you’re self-employed, any depreciation or amortization expenses from your business can typically be added back to your net income.
  • Business Use of Home: If you work from home, a portion of your home-related expenses (mortgage interest, utilities, etc.) can sometimes be added back into your income.
  • Depletion and Casualty Loss: These non-cash expenses can also be added back to your income.
  • Meals and Entertainment: These may be subtracted from your income if they were claimed as business expenses.

These adjustments can increase your net income, which in turn can improve your chances of securing a better loan. Being mindful of these potential additions or subtractions can help you prepare your taxes in a way that maximizes your borrowing power.

Strategies for Homebuyers to Prepare Taxes for Mortgage Success

  1. Work with a Tax Professional: To ensure your taxes are filed correctly and optimally for a mortgage application, it’s crucial to work with an accountant or tax advisor who understands the mortgage process. They can help identify deductions that may not be beneficial for homebuyers and ensure that your financial picture is as strong as possible.
  2. Keep Detailed Records: If you’re self-employed or a small business owner, maintaining clear and accurate financial records throughout the year is essential. This will help make the tax preparation process smoother and prevent any discrepancies when it’s time to apply for a mortgage.
  3. Consider Your Tax Deductions: Before you file, consider how your tax deductions impact your overall income. If your deductions are significant, you may want to discuss with your tax professional whether it’s worth reducing them to increase your income for mortgage qualification purposes.
  4. Prepare for a Tax Return Review: Be ready for your lender to carefully scrutinize your tax returns and potentially adjust your reported income. The more organized and transparent you are with your tax documents, the easier the process will be.

Tax preparation is a key step in the home-buying process, especially for self-employed individuals and those with non-traditional income sources. How you file your taxes can influence your mortgage application outcome, so taking the time to optimize your tax return before applying for a mortgage can be a game changer. Give us a call to find out more on understanding how taxes affect your borrowing power.