Refinance Your Mortgage BEFORE Leaving Your Job Please

Larry Ellison's San Francisco House

Larry Ellison’s SF Modern Mansion

In late January of 2012, I had a strong suspicion I was going to engineer my layoff in the coming months. I had worked at my company for 11 years and I was looking forward to doing something on my own. As a result, I knew I had to do as much as possible to lower my expenses before taking the leap of faith.

One of my biggest recurring expenses is my mortgage. Even though my initial mortgage rate from eight years ago has dropped from 5.75% down to 2.625%, spending thousands of dollars a month is still a lot of money for someone who no longer has W2 income. Every dollar of interest savings counts!

When the 10-year treasury yield dropped to 1.85%, I gave my bank a ring to see what they could do. Amazingly, they came back with a 5/1 ARM rate of 2.625% with “no cost no cash” outlay. The process started around January 27, 2012 and didn’t end until early May, 2012, 100 days later!

At the end of April (day ~80), the bank asked me AGAIN for my latest two paychecks. I clearly remember thinking to myself, Thank goodness I still have a job! I told my bankers that it was likely I would no longer have a W2 income stream come summer just to be completely up front. They thanked me for my honesty and pushed my refinance through because they said we cannot predict the future. We have a 11 year relationship and I don’t plan on defaulting on my mortgage anyway.

WHY YOU NEED TO REFINANCE BEFORE LEAVING YOUR JOB

* You need a W2 statement. No underwriter is going to approve your mortgage if they don’t have evidence of a steady paycheck. The longer you’ve had your steady paycheck, the more comfortable they will feel. On the mortgage application, they will ask for your Title, Occupation, and Years Of Employment. If you have a goose egg for all, then you are likely going to be DENIED. The exception to the rule is if you have significant amount of other assets as collateral AND you have a large enough recurring stream of MISC-INT or Dividend income that has been established for many years prior.

* Income and expenses after quitting are uncertain. You’ve done your conservative budget and think you’ve got enough to last you for however many months or years, but you never know when some random expense pops up. I couldn’t foresee a water pipe bursting from underneath my sidewalk that cost $1,500 to fix, but I had to get it fixed or else the city would fine me and I needed water! Meanwhile, entrepreneurial income is never certain. A big competitor might decide to move into your space one day and squash you. Then what? It’s important to at least lock down your largest expenses.

* A new job carries less weight. Even if you get a nice new job, the bank generally wants to see a year of employment before given you a loan. A new banking relationship with the best rate will be gun shy with someone who has only been at their job for six months. Of course, if you are refinancing with an existing bank, you might have more leeway. The other issue is that there’s no guarantee you’ll find a comparable new job in the first place. The job market is still tough out there.

* The government is the puppet master. Our government has their hand shoved so far up big banks that it’s very hard for banks to have any flexibility. My latest mortgage refi went through underwriting review over 10 times before finally getting approved 100 days later. The government has added new channel checks to make sure the bank isn’t being reckless with their lending practices. Being stringent is good for all of us long term, because it means there will be less defaults in the future. However, in the short-term, the government’s involvement has made it difficult for even the most creditworthy of borrowers.

* Lower your own risk of default. You need to be able to weather the bad times so that you are never late on payment which will hurt your credit score. Ultimately you want to lower your risk of losing your home, because no home means begging on the streets or living with relatives. Your home is much more than an investment, it is a lifestyle. The bank doesn’t want you to default since they are not in the business of selling real estate.

ONCE YOU ARE UNEMPLOYED YOU BECOME INVISIBLE TO BANKS

I encourage everyone to refinance their mortgage before quitting, retiring, engineering, or simply taking an extended leave of absence. Once a bank sees your main source of income gone, they will unlikely let you refinance with them because you are perceived as higher risk. It doesn’t matter how high your credit score is, how loyal you have been to the bank, and the fact you have a baseball collection worth more than your mortgage itself. If you no longer have a job, it is almost impossible to get a mortgage or refinance a mortgage.

RECOMMENDATION 

Shop around for a mortgage. LendingTree Mortgage offers some of the lowest refinance and new mortgage rates because they have a huge network of lenders to provide mortgage loans, home equity loans, and home equity lines of credit. Consider using LendingTree to get multiple offer comparisons in a matter of minutes. When banks compete, you win.

Udpated: 5/10/2014. I’m currently in the process of buying another home and LendingTree was great in helping me find the lowest rate. I’m getting a 5/1 JUMBO ARM at 2.5%!

Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. Romeo says

    I imagine that I’m the first one to comment only because none of your readers intend on leaving their job any time soon. :-) You usually have about 50 comments minutes after your posts. I definitely agree, especially because I remember that Crystal was having a hard time getting financed with your blogging income of over $15,000 a month. Talk about banking rules and restrictions, huh?

    On a related note, I think more of your readers would appreciate why it is best to refinance before moving from their primary residence, before deciding to rent it out. It is much more difficult to refinance a rental property if no one has enough money in the back for a 25 percent down payment and sufficient reserves to cover 6 months of rent.

    I’m eyeing the rates now. I plan on leaving my home and renting it out and less than 2 years. My current rate is 4.00% on $100,000, 29 years remaining fixed. I wonder if I can get it down to 2.5%? haha

    • Financial Samurai says

      Ah, you won the first commenter lottery! It’s b/c I just published this article at around 11:55am. Takes time to read and digest.

      I do have an upcoming post on refinancing before renting and will explain the mechanics and philosophy behind it.

  2. Untemplater says

    Makes a lot of sense and renters who are relocating should also aim to secure a lease while still having a regular paystub. The rental market is so competitive these days and owners can be as picky as they want. My mother is hopefully going to refinance this month which will help her cut back on expenses before she retires.

    • Financial Samurai says

      Good point on renters too.. as unfortunately, the landlord is going to choose the person with a job than someone without a job, even though savings might be greater. There’s definitely a lot of art to selecting.

  3. charles@gettingarichlife.com says

    Sam,
    That pretty honest of you to tell the bankers about a possible income loss. When we were going through a possible layoff last year I refinanced to lower my rate and expenses. A recommendation is to refinance at least three months prior due to how long it takes the bank to process you loan.

    We recently bought a new house and put 20% down, I now have a home equity line for 10% of the equity as an emergency credit line. I got my primary mortgage through one of the major banks, and one of the community credit unions is providing the second line after closing. I recommend this to any homeowner just in case you lose a job that line is there.

    • Financial Samurai says

      Yeah, I’ve known my bankers for a long time now, and I just said that I’ve been thinking of doing something else in the near future. We’ve all talked about life after work before.

      Even if I told all their bosses that I was sure I was leaving my job, they still can’t use that in their underwriting until I no longer have a job, or have some kind of document from my company saying I will be leaving on X date.

      Either way, I don’t plan to default given I’ve got a lot of equity in the house. A HELCO is good. Too bad rates are over 4% from what I’ve seen.

  4. retirebyforty says

    I refinanced all my loans last year because I thought I might be leaving my job this year. My rates are OK, but would have been better if I waited a bit. Oh well, it’s still better than previous rates. :)

  5. TB at BlueCollarWorkman says

    This is a GREAT piece of advice. It’s not something I ever really thought about, but those W2 forms can make things happen, it’s true. Once you look unemployed, the ways banks and companies view you is quite different. And honestly, the first moment you think you could have a lower interst rate, you should do it.

  6. krantcents says

    I bought my townhouse with nothing down, borrowing the down payment (from my line of credit) and self employed. I went with a no verification of income mortgage. I paid off my line in less than 10 months and owe practically nothing ($61K) for a $400K+ (value) property. I do not recommend that to anyone, but I had other resources, if I got in trouble. I think that is the key.

    • JT says

      I’m guessing that from the debt to asset ratio here that this was a purchase from a long time ago? Surely there aren’t any banks still making no money down loans with a borrowed down payment to self-employed people.

  7. Pauline says

    I refinanced at 2.29% just before I left my 9 to 5 job, and with the same bank. There was a link on my online banking saying “change your mortgage” and a few clicks after that I was all set with a new mortgage. They just asked if my situation hadn’t changed and I ticked no, but didn’t have to prove it.
    I get the point that you are perceived as a higher risk if you have no regular income, although you are more likely to pay back at 2.5% than you were at 6%!!

  8. Jacob @ iheartbudgets says

    Sam, this is great advice, and should be obvious, but those who are zealous to make the leap might overlook such a great savings opportunity and cut the rope a bit too early. I hope rates are great in a few years so that a Refi is in my future. If not, I’m stuck with 5% until I pay off my mortgage (early, of course).

  9. Mrs. Pop @ Planting Our Pennies says

    You can extend it a bit further even if you’re not planning on quitting your job.
    For us, we refinanced BEFORE we used a $38K home equity line of credit on another house. When the refi completed, the balance on the HELOC was $0, credit available $38K. A week later, the numbers were flopped because we used the money to buy another property. Our credit availability ratios would have been completely different if we hadn’t gotten that in before the purchase.

  10. Kim@Eyesonthedollar says

    I’ve found any change from the norm can throw them off. On our last refinance, they looked at our schedule K returns incorrectly and though that income had gone down from 2010-2011, when it actually went up. I had to write letter to correct their mistake. Even if it had gone down, we have more than enough income to make the payments. I would refinance before any sort of change in job or income, even if you are going to a better paying one that doesn’t have history.

  11. The College Investor says

    I’ve had several friends try to buy a house without a true job. They were both self employed, made 6 figures a year, and they both got denied by banks even though they had 20% down and years of records proving how much they made.

    What is the difference between being self employed with years of a steady income, or having a job which you could get laid off from at any minute?

    • Financial Samurai says

      Amazing isn’t it? That’s the way it is. The self-employed and unemployed are invisible to banks. They have enough people to lend to, so they can afford to be picky.

      They don’t lend as much or at all b/c their history has shown a higher delinquency ratio.

  12. Money Beagle says

    When I got my original mortgage for our place back in 2007, I had just gotten hired directly by my company whereas before I was a contract employee, with my paycheck coming from a different company. Nowadays that could potentially cause a problem but it didn’t cause an issue. You might want to check into stuff like that, even if it’s not leaving your job.

  13. Jason says

    If our house doesn’t sell we’re going to take it off the market in November and refinance to a 5/1 ARM. It should be interesting to see how it goes as my wife has only had her new job for 2-3 months. I’ve been told that won’t be an issue but we shall see…

    We only got quoted a 3.0% on a no cost refinance; it would have been 2.75% if we were willing to pay the closing costs.

    • Financial Samurai says

      Hey, 3.0% is still a GREAT rate! Go for it, as I’m assuming your existing rate is much higher if you haven’t refied in the past 6-12 months.

      What will you do if you sell? Downsize, relocate, upsize?

  14. Jason Clayton | frugal habits says

    Good point on needing your paychecks for proof of income. That didn’t occur to me and I just refinanced a few months ago.

    I used an arm when I lived in Texas, because I knew I would be leaving in less than 5 years. It saved me a ton of money. Risky – yes, but if done correctly can be great for your pocketbook.

  15. Financial Advice for Young Professionals says

    This is why I love the no cost option! We can’t pick the bottom like you mention but as long as you no cost refi every time you can keep doing it. I just finished my second no cost refi in the last year. I’m now at 3.125 7/1 ARM, not bad for a condo :)

  16. AverageJoe says

    It was frustrating trying to help retirees with no income stream refinance BEFORE the housing crisis. I can’t imagine how difficult it would be now. When your process took 100 days was the rate locked? That much time can make a borrower worry a little…

    • Financial Samurai says

      Yeah, the rate was locked, and if it was about to become unlocked, my bank just relocked it at their expense. During 1H12, rates stayed low and about the same.. they are still about the same, but bank’s margins might have gone up a little, causing rates to have gone up.

  17. Janelle says

    Thanks for writing this. I stumbled upon it in my search for advice on whether to buy a house before I quit my job. We just found a $100k condo that we’re interested in, but as a first time homeowner, I’m unsure of the expenses in owning a home and whether we want to take on the risk at such a transitional time. For the record, I’ve already turned in my notice to leave at the beginning of 2013 and my partner is going back to school. I’ll be freelancing for my current employer in addition to other online ventures.

    The monthly payment to buy would be very close to our current rent and we have a 10% downpayment, which would still leave me with 12 months of expenses.

    Any advice? Should we buy now to avoid the hassle later or wait it out?

    Thanks!

  18. Justin Lamb says

    Okay my older sister is going through a divorce and she was laid off like two weeks after leaving him.She has been looking for work since October of 2012 since this happened.I am try to find out if she can refinance the home that she wants out of the divorce.She has 14 days.Can she get this done?Will the bank understand.Please let me know so I can tell her.

  19. Sophie says

    I’ve had a permanent position for 5 yrs but was laid off for 7 months. Since then, I’ve found new work as a consultant. I applied for mortgage refinance when I was consultant when I was at 3 months and was denied with a bank bc I was a consultant that contracted for 6 months. I have since been extended and now in my 10 month. I’ve decided to refinance with my current mtg company Wells Fargo figuring transition will be better and have an existing relationship than a bank. Can they deny you as a consultant that has term contract? I’m an employee of consultant firm where I do have health benefits.

  20. S says

    Out of curiosity how did you get a no cost no cash outlay. Maybe I am not understanding correctly. I have never been able to refinance without a cost. The no cash I understand as closing costs can usually be rolled into the new mortgage and typically the interest savings cover those in a year or less. But are there places that offer no closing costs?

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