Do Your Refi Homework

Before you begin to search for a lender to refinance your home, do your homework to learn exactly what your borrowing limit is. It’s important to keep in mind that some lenders are more liberal with their debt limits, so it is recommended that you use the limit guidelines of the Federal Housing Administration. An FHA loan would require that the total monthly cost of housing not exceed 31 percent of your pretax income. So, if your monthly income is $5,000, your housing costs, including mortgage principal and interest, taxes, insurance and homeowners association dues, shouldn’t exceed $1,550. If you really want to play it safe, you could tack on an extra point or two to that cap and limit your costs to 29 or 30 percent.

You need to also consider your total debt picture, as most lenders do, to account for your total debt costs in relation to your income. The FHA requires that your total debt costs not exceed 43 percent of your monthly income. That includes any other mortgages, car loans, credit cards and child support. Again, some lenders offering non-FHA loans may be more liberal with their limit, but, unless you are 100% sure that your income or debt situation will dramatically improve, you should assume a more conservative position with your lender.