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Q&A: Is my income too low for a refinance?

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Man looking at a computer screen istock.com image for Gary Rodgers / MONEY&CAREERS Photo Credit: ISTOCK.COM/istock.com

Q: I lost the major portion of my income and I am looking to lower my mortgage payments, but my concern is that my income will now be too low for me to qualify for a refinance. I hate to spend the $500 for an appraisal and then be told that my income won't allow me to qualify for a new loan. I have maintained my mortgage payment over the last three years with this same income, but I have to do something to get mortgage payments lower. I have not been late with a payment. Should I go ahead with an appraisal, or is there some way to figure out whether I'd qualify ahead of time?

A: Do you have an Federal Housing Administration or Veterans Affairs loan? If so, you can ask your lender to do an FHA or VA streamline refinance. With an FHA or VA streamline refinance, the lender is not supposed to pull an appraisal of the property. Essentially, you get your interest rate lowered, and the rest of the mortgage terms remain the same. This should cost you a few hundred bucks at the most.

If you don't have an FHA or VA loan, the situation gets a little more complicated. Do you have equity in the property? If you have at least 5 percent equity in your home, you should qualify for an FHA refinance. In this case, you will be able to get a lower interest rate, but you will have to pay mortgage insurance, which could make the new loan almost or more expensive than your current mortgage.

Is your home underwater (that is, is the home worth less than the mortgage amount)? If the answer is yes, then the next question is by how much. The government has required approved lenders to offer Making Home Affordable Refinance mortgages to qualified borrowers. Again, you'll get a lower interest rate, but you will have to pay mortgage insurance, so it could be costly.

To get the ball rolling, you should start by talking to a bunch of lenders about where you are. Give them three scenarios: You have equity, you have no equity, and you're underwater.

You shouldn't have to apply for a mortgage or give them your Social Security number at this time. Just sit down and go over your income and debts and give them some other information about your home, and the mortgage lender or mortgage broker should have a pretty good idea if you might qualify for a new loan.

If you do qualify, you can decide whether the loan products that you are offered would save you any money. You didn't mention what your mortgage interest rate is or how many years you have left on your loan.

You need to think through your refinance strategically: You might think you're getting a better deal only because you reduce your monthly loan payment. But if you're 10 years into your loan and refinance, your lower monthly payment could translate into an additional 10 years of payments, ultimately costing you tens of thousands of dollars. On the other hand, if this is the only way to stay in your home, it's worth it.

You should also call your current lender. While lenders have not been very willing to grant homeowners loan modifications, you could try to see if you qualify for one. Be careful, however, if your lender tries to put you into a trial loan modification. If you participate, your credit score and credit history may take a big hit and you might then be unable to refinance your home even if you did qualify.

Given all of these issues, it would be wise for you to find a reputable mortgage lender or mortgage broker in your area to consult. Just be careful, take good notes and examine all of your options before you say yes to anything.

Ilyce R. Glink's latest book is "Buy, Close, Move In!" Samuel J. Tamkin is a Chicago-based real estate attorney. Distributed by Tribune Media Services

Need some real estate advice? E-mail your question to realestate@newsday.com.

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