Q. I am a new widow after being married 30 years. I am blessed to have a roof over my head and all my daily needs met. But I would like to refinance my mortgage because I am no longer eligible for my husband’s health insurance so I need to pay $2,300 a month for me and our two younger sons. I am 57 so I’m not yet eligible for Social Security until I’m 60. I’m having trouble refinancing because my debt-to-income ratio is way off. I have an IRA but with five children, I’m trying not to touch this until the future. — Widow
A. We’re so sorry to hear about your husband.
As you’re seeing, financial challenges often arise with the passing of a spouse and navigating them can be difficult.
Your goal of refinancing may allow you to arrange a lower mortgage payment by extending the term of the mortgage and allow you to cash out some of the equity so you have a pool of money to use for living expenses, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge.
She said there are a number of factors that will impact your ability to qualify for refinancing and the debt-to-income ratio is one. The amount of equity in your home, other liens you may have such as a second mortgage and the home’s assessed value are other components that are considered. Mott said.
The debt-to-income ratio compares the total of your existing loan payments to your gross monthly income, and as you noted, not having Social Security is going to have a substantial impact on your income figure.
“Lenders use this ratio to measure the applicant’s ability to repay the loan and also to assess the interest rate,” she said. “More attractive debt/income ratios will lead to lower interest rates.”
Mott said many lenders will use the 28/36 rule along with a credit score when evaluating an applicant.
“Conceptually, the ideal candidate will have housing costs that are 28% or less of their total income and a debt/income ratio under 36%,” she said. “Research has indicated that borrowers with debt-to-income ratios in excess of 43% pose a repayment risk and that is the upper limit used by many lenders.”
However, she said, smaller banks, credit unions and private lenders may be less restrictive on the debt/income ratio and you should research the requirements at these providers also.
If your debt-to-income ratio is far in excess of the acceptable limits, taking a hard look at your overall financial picture may be necessary, Mott said.
If there are debts beyond a mortgage, finding extra dollars to put towards paying those off will improve your ratio, but it may take some time, she said.
This would involve taking a deep dive into your monthly living expenses and determining what is essential and what is discretionary.
“Discretionary expenses such as dining out, entertainment, clothing in excess of the necessities are often good places to start,” she said. “But these days we can often find savings by cutting back on subscriptions to services we don’t use, cancelling unnecessary memberships, reducing cable package extras, changing phone plans or reviewing insurance costs.”
Mott said preserving the retirement accounts is a good goal to achieve. Those assets will be important for you in the future and it is good to know that you don’t wish to use those funds.
However, she said, you may need to consider increasing your income by finding employment if you aren’t working, or moving from part-time to full time or looking for other ways to improve the income picture.
“While you noted that you will qualify for Social Security at age 60, please be aware that you will get a 28 1/2% discount in the amount of the benefit you receive by filing prior to your full retirement age,” she said.
Email your questions to Ask@NJMoneyHelp.com.
Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.