Here’s a common situation many homeowners face: the old mortgage has a much higher interest rate than the rates available today, and you could save hundreds of dollars each month by refinancing. Your home has built up plenty of equity, so no problems there. However, there is one issue; you don’t have enough income to be eligible for the loan you need.
How To Refinance A Home With Low Income
One of the critical things lenders consider when qualifying someone for a refinance with low income is their Debt to Income ratio or DTI. DTI is calculated by adding up the total house payment (including taxes and insurance) and all the borrower’s debt (credit cards, student loans, car loans, etc.). Then they divide that total number by the total gross monthly income. Lenders don’t allow the DTI ratio to exceed 45%.
There are many reasons why the DTI can get too high. Maybe the family had two incomes when they applied for the original loan and now only have one; there could be more debt in the picture or many other possibilities.
It should be noted that your credit score does not affect this. If you have flawless credit, but your DTI is 45.01%, you won’t get the loan.
If your DTI is too high, getting a second job won’t solve it. Your income from a job doesn’t count until it has seasoned for at least two years.
Solving a High DTI
Here are two common methods to lower the DTI:
- If your DTI is just a bit high, it may be possible to “buy down” the rate. By adding one point (1% of the loan amount) to the loan, you can drop the interest rate by .25%. On a $300,000 loan, this difference in the rate will reduce the monthly payment by $40.
- If you have consumer debt on your application, paying off some or all of it will also improve your DTI. Paying off a $5,000 credit card will decrease your monthly debt payments for qualifying purposes by $150. Keep in mind that while using home equity to pay off your credit card can be a good plan, it does no good to let the account balance climb again.
The bottom line is, having a DTI does not mean it’s hopeless to refinance. Some creative solutions may work for you.
Refinance Questions?
Many homebuyers are eager to refinance their home but are concerned that they don’t have high enough income to qualify for a new loan. Working with an expert and reputable lender can help you find the right loan that meets your needs and works with your DTI, income and budget.
If you would like to learn more about refinance options for low income homeowners or discuss your qualification in more detail, you can reach out to one of our expert Client Advisors. Our team is available 7 days a week by email at [email protected] or by phone at (855) 855-4491.
