A mortgage refinance has always been dependent on a good credit score. In the past, people with solid credit histories have had nothing to worry about. However, recent actions taken by the credit card industry are affecting even credit-worthy people who've always played by the rules, casting doubt on their ability to get a mortgage refinance.
People with good credit scores are feeling increasingly frustrated these days, and the latest moves by credit card companies are only going to throw gasoline on the fire. Because of the credit crunch, panicky credit card companies are taking risk management guidelines to disturbing new highs (or lows, as the case may be).
Credit utilization could affect your credit score
The recent moves by credit card companies can affect a typical mortgage refinance, especially the slashing of credit limits. It's a move that even will affect people with pristine credit histories, especially when they're trying to qualify for a mortgage refinance.
Why are people who've done nothing wrong being penalized? Here's how it works: Part of your credit score is dependent on your debt load. People who tend to max out their credit cards have borrowed right up to their limits. This is referred to as your "credit utilization," and when credit bureaus see that you've over-utilized your credit, they give you a lower score.
Lately, credit card companies have lowered credit limits. As a result, even if you pay off your balance in full every month, it will appear that you're over-utilizing your credit, because the spread between your limits and your highest balance for the month will have decreased. Your credit score will drop, and your lender will have no choice but to question if you're qualified for the loan.
Debt ratios more important
Similar to credit utilization, debt ratios are becoming increasingly important, too. While credit utilization focuses on the amount of credit you carry in relation to your credit limits, debt ratios look at your debt as a percentage of your monthly income.
In a mortgage refinance, if your mortgage and consumer debt payments exceed 38 percent of your overall income, you may not qualify for a loan. Even if you have pristine credit, lenders are becoming increasingly adverse to people who carry heavy debts.
To avoid high debt ratios, you may have to focus less on saving for a big down payment, and more on reducing your consumer debt. This won't be an easy process, but it's the new lending paradigm, so borrowers will need to find a way to adapt to the current marketplace.
Lowered credit limits and increased scrutiny on debt ratios is hurting even people who have maintained a solid credit score. To adapt to the new guidelines, find out your credit score and work to lower your debt. This new lending reality is just the latest in an economic nightmare.
