Mortgage Refinancing - Your Credit is Affected by Major Life Changes

Lenders use two simple ratios to determine how much money you can borrow to refinance your home.
- Step 1: Write down your total gross pay per month, before deductions for taxes, insurance, etc.
- Step 2: Multiply the number in Step 1 times .28 (28%). This is the amount most lenders will use as the guideline for what your total housing costs (principal, interest, property taxes, and homeowners insurance, or PITI) should be. Some lenders may use a much higher percentage (up to 35%, but most people cannot realistically pay this much towards housing, and Ratio #2 often makes this a moot point).
  
  Example: The combined income for you and your spouse is $70,000, or $5,833 per month. ( $5,833 x 28% = $1,633.) Your total PITI should not exceed this amount.
Debt to income.
- Step 1: Write down all of your monthly debt payments that extend for more than 11 months into the future, such as car loans, furniture or other installment loans, credit card payments, student loans, etc.
- Step 2: Multiply the number in Step 1 times .35 (35%). Your total monthly debt, including what you expect to pay in PITI, should not exceed this number.
  
  Example: You and your spouse have credit card payments of $200 per month, car payments of $183 and 350, student loan payments of $100 and $75, payments of $100 per month for furniture you purchased on a revolving credit account and will pay off over a two-year period, for a total monthly debt payment of $1,008.
  
  Multiply your total monthly income of $5,833 per month times .35 (35%). Your total monthly debt, including PITI, should not exceed $2,041. Subtract your monthly debt payments of $1,008 from $2,041. This leaves you $1,033 a month for PITI.

Two Tips:

If you are considering going into business for yourself or starting a new company, don't! It is best to wait until your loan has gone through before making such a move.
Making a major purchase at this particular time is not a good idea because it increases one's debt to income ratio. If, for example, you were to add a $300 monthly payment on top of your current bills, you will now qualify for a mortgage payment that is $300 less. Any unnecessary major purchase should be made after your loan has been approved to determine what additional expenses you can take on.