- 403(b) Plan at a Glance
- Mortgage Refinance
- Other Debt Resolution Options
Should I receive a distribution from my 403b to slash my DTI, and therefore qualify for a mortgage refinance.
I will be 56 this month. My monthly income does not meet my debt. I rent an out of state property, with a second mortgage, which is becoming too much to bare. I cannot refinance since my debt to income ratio is too high. Should I withdraw funds from 403bs to pay off some of the debt, thus lowering my DTI ratio, making me a candidate for refinancing? I need all the advice you can provide.
A Tax-Sheltered Annuity Plans (403(b) Plan) is a retirement plan for some employees of public schools, employees of tax-exempt organizations, and ministers. It has tax treatment similar to a 401(k) plan, the only important differences for the participant are some additional ways that they can withdraw employer money, not salary-deferral money, before the typical 59½ age restriction, but only if the plan is funded with annuities and not mutual funds. Consult with your plan administrator for specific rules regarding distributions under your plan.
Refinance Qualification
Even if you decrease your DTI, a mortgage refinance is not necessarily a sure thing. As you no doubt recall, a mortgage lender wants three things from a potential customer: Steady income, a relatively clean recent credit history, and a debt-to-income ratio of 35% or less. Customers who qualify for a mortgage or a mortgage refinance have all three of these qualities, plus a down-payment in the case of a mortgage.
A refinance is almost exactly the same. You need to do some homework to see if you qualify. Start with the Bills.com article How Do I Get a Mortgage Refinance Loan? Next, I recommend you download a Uniform Residential Loan Application (Form 1003), complete it, and start your refinance mortgage loan shopping. Then, go to the Bills.com mortgage refinance saving center for no-cost, pre-screened quotes from mortgage refinance lenders.
Other Debt Resolution Options
You do not mention if the second mortgage itself is causing your distress, or if you have other debts that are pulling you under water. You have other options to consider if a mortgage refinance does not meet your needs. Since there are a variety of debt resolution options, including credit counseling, debt negotiation/debt settlement, a debt consolidation loan, bankruptcy, and other debt resolution options, it is important to fully understand each option and then pick the solution that is right for you.
Credit Counseling
Credit counseling, or signing up for a debt management plan, is a very common form of debt consolidation. There are many companies offering credit counseling, which is essentially a way to make one payment directly to the credit counseling agency, which then distributes that payment to your creditors. Most times, a credit counseling agency will be able to lower your monthly payments by getting interest rate concessions from your lenders or creditors.
It is important to understand that in a credit counseling program, you are still repaying 100% of your debts -- but with lower monthly payments. On average, most credit counseling programs take around five years. While most credit counseling programs do not impact your FICO score, being enrolled in a credit counseling debt management plan does show up on your credit report, and, unfortunately, many lenders look at enrollment in credit counseling akin to filing for Chapter 13 Bankruptcy -- or using a third party to re-organize your debts.
Debt Settlement
Debt settlement, also called debt negotiation, is a form of debt consolidation that cuts your total debt, sometimes over 50%, with lower monthly payments. Debt settlement programs typically run around three years. It is important to keep in mind, however, that during the life of your debt settlement program, you are not paying your creditors. This means that a debt settlement solution of debt consolidation will negatively impact your credit rating. Your credit rating will not be good, at a minimum, for the term of your debt settlement program. However, debt settlement is usually the fastest and cheapest way to debt freedom, with a low monthly payment, while avoiding Chapter 7 Bankruptcy. The trade-off here is a negative credit rating versus saving money.
Bankruptcy
Bankruptcy may also solve your debt problems. A Chapter 7 bankruptcy is a traditional liquidation of assets and liabilities, and is usually considered a last resort. Since bankruptcy reform went into effect, it is much harder to file for bankruptcy. If you are considering bankruptcy, I encourage you to consult with a qualified bankruptcy attorney in your area.
Recommendation
Although there are many forms of debt consolidation, many people with good to perfect credit who own homes should look into debt consolidation loans, while consumers with high credit card debt and poor credit may want to explore debt settlement or debt negotiation. However, each consumer is different, so find the debt consolidation option that fits for you.
Lastly, here are some fast tips for your own quick Debt Consolidation Evaluator:
1. If you have perfect credit and have equity in your home -- consider a Mortgage Refinance.
2. If you can afford a healthy monthly payment (about 3 percent of your total debt each month) and you want to protect yourself from collection and from going delinquent -- consider Credit Counseling.
3. If you want the lowest monthly payment and want to get debt free for a low cost and short amount of time, AND you are willing to deal with adverse credit impacts and collections -- then evaluate Debt Settlement.
4. If you cannot afford anything in a monthly payment (less than 1.5 percent of your total debt each month) -- consider Bankruptcy to see if Chapter 7 might be right for you.
I hope this information helps you Find. Learn & Save.
Best,
Bill