Should I refinance my car before buying a home?

Short answer: probably not. 

Why? The refinance of the car will impact your credit score as if you have purchased a new car. Credit scoring favors established older debt over new debt. Once you have that new loan, even if the payment is lower and interest rate is lower, the established old debt is paid off and eventually loses the positive impact to your credit scores.

Your new refinanced loan will also impact your credit as it will be considered 100% financed of the new loan amount. You don’t receive any boost to your credit for if your car is valued at $20,000 and new your loan amount is $10,000. Credit scores improve once your debt is at 50% of the debt amount and an additional improvement to credit scoring once the debt reaches 30% of the new loan amount.

If you’re refinancing for purposes of qualifying, do check with your licensed mortgage originator first. It’s possible that if you have 10 payments or less remaining, the car payment may not need to be factored into your debt-to-income ratios.

If you can qualify with the current car payment and are considering buying a home, you may be better off delaying the refinance until after your new home purchase has closed.

Do check with your mortgage professional before taking my advice as your financial scenario may call for different actions.

If you are interested in refinancing your home located anywhere in Washington state, I’m happy to help you! 

Answering a question regarding HARP 2.0 and PMI

Dear Rhonda:

I currently pay PMI on my mortgage, if I refinance under HARP 2.0, after refinance, will the PMI still exists? Would the PMI premium be lower since the amount refinanced is lesser than the previous mortgage?

Dear Reader:

Yes, if you currently pay PMI on your HARP 2.0 eligible mortgage, you will also have private mortgage insurance in your new mortgage payment with your new refinanced mortgage.  It will be based on the same coverage (percentage) amount as your existing pmi. So if your mortgage balance is lower, the monthly pmi payment may be slightly lower as well.

I recommend comparing your existing payment (PIMI) to the proposed new payment, factoring in when your existing PMI may drop off.  If you’re within months from your existing pmi dropping off, it could be worth delaying refinancing, however, if t’s after December 2013 (when HARP 2.0 is currently scheduled to terminate) it’s probably in your favor to refinance now.

If your home is in Washington state, where I am licensed to originate, I’m happy to help you.

Your write-offs may impact qualifying for a mortgage

From my email bag:

My husband and I are in the process of looking for a lender we are negotiating an offer at this time. We are both paid with W2-s and fear that we will be asked for our tax returns since we have plenty of write-offs as we are in sales. In this case, will the lender look at our adjusted income on our tax forms instead of the yearly salary?  

The lender will most likely have to use a net-income when you have significant write-offs on your tax returns. Since you're in sales, depending on how you are paid (for example, if you're paid commission) the lender may request your income tax returns due to this very example.  

Even if you're paid an annual salary, the 4506T that lenders use on transactions to obtain tax transcripts from the IRS will reveal your write-offs and the lender will most likely require your tax returns and make the appropriate adjustments to your income. This is also true when qualifying for a refinance.

When you're completing your tax returns, you may want to keep in mind that what you report to Uncle Sam is also what the lender will be viewing when you're obtaining a mortgage.  Self-employed borrowers who appear to make little income on their tax returns may also find themselves being impacted with how large of a mortgage they will or will not qualify for.

Remember, I'm not a CPA nor a tax expert. I do specialize in originating mortgages for homes located anywhere in Washington. I have been a licensed mortgage originator since January 1, 2007 and have been at Mortgage Master Service Corporation since April 1, 2000. If I can help you with your home purchase in Seattle or your refinance in Redmond, or anywhere in Washington, please contact me.

Calculating Bonus Income

Here's a question from one of my readers (not one of my clients) regarding how bonus income is treated for qualifying for a mortgage:

I am trying to close on a property and the loan processor is giving me a hard time about my income.  I am suppose to make $53,000 this year.  Last year I made $50,000 according to my W2.  My base salary is locked at $32,000 with the other income being a commission or bonus based off my offices profit.

Currently the loan processor is taking my year to date bonus/commission and dividing it by 12.  She is stating that this is how they are the bonus income is annualized so it is making it seem like my projected income for the year will be 32,000 + approx 5,000 = 37,000.  This is making my income to debt ratio pretty low.  Do you have any advice on how I can get this adjusted or if this is actually the correct way my income should be calculated?

Lenders are looking for trends with income.  Since your base income is a salary, the processor can give you credit for the entire amount.  If your additional income is bonus or commission, then lenders may go back 24 months to create an average bonus/commission income.  If your income is trending lower, best case–the lender may use the current average for your commission/bonus income.  Lenders are looking for "stable" income…if the income is considered unstable, there may be issues.

Most lenders will typically go back 24 months including year to date bonus income; and average it since this type of income fluctuates and is not a guaranteed fixed amount.   Hopefully your bonus income in 2009 is close to what your 2010 bonus income was and shows a positive income trend.  You need to document that you've been receiving your bonus income for a minimum of two years.   

2009 = $20,000 Bonus Income

2010 = $23,000 Bonus Income

3/31/11 = $5,000 Bonus Income

$48,000 divided by 27 (24 plus 3 months) = $1778 monthly bonus income.

If the base salary is $32,000; your loan application will reflect base monthly gross income of $2667. (32k divided by 12 months).  Even if the base salary was lower in previous years, the current base (assuming it's a bona fide salary) is what is used to determine current monthly income for qualifying for a mortgage.

$2667 plus $1778 = $4,445 averaged monthly income (based on the example above).

Another factor to keep in mind is that lenders will pull 4506 Request for Tax Transcripts so if you write-off significant amounts of your business expenses, this may deducted from what the lender uses for your income. 

Verification of Employment forms (VOE) will be sent to your employer to verify that your bonus is likely to continue.  If your lender is relying on a Verification of Employment for your bonus income, they may annualized it (divide the current year to date amount by 12 months) instead of using an average.  Plus, if your employer indicates that the bonus income is not likely to continue, it should not be used for qualifying purposes. 

Dear Reader:

It appears to me that the processor is "annualizing" your bonus income ($5000 divided by 12 = $417) instead of averaging.

Talk to your mortgage originator about supply documentation (last two years tax returns, W2s and/or 1099s) to support your income to see if this will change how the processor is calculating your income.   

Good luck!