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.
* Independent contractor income only counts if you have two years worth. I recently inquired about refinance my latest mortgage via LendingTree. I spoke to a banker about having one year of 1099 (independent consulting) income for 2014. He said that I need two years of 1099 income to count. Even though I made over $100,000 in 1099 income in 2014, the bank still won’t count it if I don’t have another full year. With LendingTree, I was able to talk to another bank who is providing new ways to get my debt-to-income ratio down below 42%.
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.
RECOMMENDATIONS TO BUILD WEALTH
* Shop Around For A Mortgage: LendingTree Mortgage offers some of the lowest refinance rates today because they have a huge network of lenders to pull from. If you’re looking to buy a new home, get a HELOC, or refinance your existing mortgage, consider using LendingTree to get multiple offer comparisons in a matter of minutes. When banks compete, you win.
* Check Your Experience Credit Score Today: For only $1 you can check what your latest Experian credit score is straight from their website. It’s a good idea to see what your credit score is before applying for a loan. If it’s below 720, you won’t get the best rate, but at least you can spend time to improve your score. Furthermore, 1 out of 4 credit reports have errors, negatively affecting one’s credit score. I had a $7 late electric bill that crushed my credit score by 100 points and almost derailed my mortgage refinance. The scary thing is, I had no idea for years! Check your credit score today.
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Updated for 2016 and beyond.