your financial details.
Mortgage rates are still relatively low. That means that there’s no time like the present to consider refinancing the mortgage loan you have for your home. Shaving at least a point or two off your current rate or converting your 30-year loan to a shorter 15-year term can help you keep more of your money in your pocket and out of the hands of lenders.
Before you go looking for a refinance loan, it’s a good idea to polish up your application package to make yourself as appealing as possible to lenders. SmartAsset has put together a quick checklist of things you need to do that can up your odds of getting your new home loan approved.
1. Track Down All Your Documents
Refinancing your home usually involves just as much paperwork as your original mortgage loan required. So getting your ducks in a row ahead of time can make the process a bit easier. You’ll likely need proof of income from your pay stubs for the past few pay periods and copies of your tax return for the last two years. If you’re receiving any child support or alimony payments, it’s also a good idea to have receipts or canceled checks on hand to show the sources of that income.
Next, you’ll need to gather up recent statements from your bank and investment accounts as proof of your assets. Lenders often check your account history from the past two years, so it’s best if you hold off on making any big withdrawals or deposits in the months leading up to your refinance application. If you do have any unusual banking activity, be prepared to explain it to the lender with documents to support your claims.
2. Take a Look at Your Credit
Lenders want to see that you’ve got enough income to cover your monthly payments after you refinance, but they’ll also be concerned with your credit score. If it’s been a while since you checked it, there’s no reason to put it off any longer.
There are plenty of ways to check your score without paying anything. You can get free copies of your credit report from each of the three reporting bureaus through AnnualCreditReport.com. Also, a number of credit cards now offer complimentary FICO scores to card members. You can also get a look at your credit score from SmartAsset.
3. Find Out What Your Home Is Worth
Unless you’re applying for an FHA Streamline Refinance, you’ll need to have an accurate estimate of what your home’s value is before applying for a new mortgage loan. The bank must have enough information to decide how much of a loan you’re eligible for. If the appraisal value comes in too low, you may not qualify for a refinance at all. That’s something you want to know before you get too far along in the application process.
Bottom Line
Doing a little homework before you enlist the help of a professional can give you an idea of whether it’s worth it to shell out several hundreds of dollars for an appraisal. From there, you can compare your home’s value to the sale prices of similar homes to determine what ballpark you’re working with.
If you want more help with this decision and others relating to your financial health, you might want to consider hiring a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with top financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
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Why Thereâs No Way to Avoid Paperwork When Refinancing
your financial details.
Jan 20, 2017
So you’re ready to refinance your mortgage loan to one with a lower interest rate. This could be a good move. Depending on your new interest rate, you could save a good bit of money each month in mortgage payments. You might also think that because you’re refinancing with your current mortgage lender, the one you already send your home loan payment to each month, you won’t have to come up with the reams of paperwork usually involved in a mortgage refinance.
Check out our refinance calculator.
On this latter point, you’d be wrong. Your mortgage lender will always require you to come up with certain documents to prove your income, job status and credit score. This holds true even if you’re refinancing with the mortgage lender who is servicing your existing loan.
So get ready to dig for that paperwork. When you’re refinancing, there’s usually no way around it.
Existing Lenders Need Papers to Approve a Refinance
You might think this makes little sense. After all, your mortgage lender verified your job status and income just five years ago when you took out your existing mortgage loan. But look at it from your mortgage lender’s perspective. Your lender’s job is to make sure you can make your mortgage payments each month, without defaulting on them.
When you apply for a refinance, your lender must verify that your financial situation hasn’t changed since you were first approved for a mortgage loan. Your lender doesn’t know if your spouse lost a job or that you no longer own a rental apartment that once provided steady income each month.
Related Article: 3 Smart Reasons to Refinance Your Mortgage
If your income has changed since you first applied for a mortgage loan, you might not be able to afford your new monthly payment, even if it’s smaller than the one you’re making now. So your lender, playing it safe, requires you to verify your employment status and income before approving you for a refinance, even if he or she has been receiving regular home loan payments from you for years.
Here’s the interesting part of all of this: Because your current lender will require you to provide as much paperwork as any other one would, you might as well shop around when you’re ready to refinance. You can choose any lender licensed to do business in your state. And you might find someone offering a lower interest rate than your existing lender.
The Documents You’ll Need to Refinance
If you are ready to refinance – whether with your current lender or a competitor – you’ll have to provide certain information to prove your income and job status.
You’ll likely have to submit pay stubs from at least the past month and your W-2 forms from the last two years. You’ll need to send copies of your most recent bank account statements and maybe even your tax returns from the last two years.
Your lender will also check your credit to determine whether you have a history of paying your bills on time. Again, you might find this strange. Haven’t you been sending in your monthly mortgage payments to this lender? What your lender doesn’t know is if you’ve been paying your car loan or student loan payments by their due dates. Your credit score will give lenders a more complete view of your financial habits.
Related Article: 3 Must-Do Moves to Prepare for a Mortgage Refinance
Bottom Line
Providing all this paperwork isn’t much fun. But it’s the only way mortgage lenders can make sure you can afford to refinance. This holds true even if you’ve already established a long-term relationship with your lender.
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Dan Rafter has been writing about personal finance for more than 15 years. He is an expert in mortgages, refinances and credit issues. Dan’s written for the Washington Post, Chicago Tribune, Phoenix Magazine, Consumers Digest, Business 2.0 Magazine, BusinessWeek online and dozens of trade magazines.
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3 Banking Moves That Can Tank Your Refinance
your financial details.
If you’re gearing up to refinance your mortgage, the lender’s going to want to check out your credit and assets before you’re approved. One of the things they’ll pay attention to is what’s in your bank account. So if you haven’t gotten those statements ready yet, there’s no time to waste. If you don’t want to raise any eyebrows with the lender, there are certain banking moves you probably won’t want to make until after refinancing.
Check out our refinance calculator.
1. Moving Your Money Around Too Much
Any time a bank lends you money, they’re taking on a certain degree of risk. Seeing that you’ve got a nice wad of cash saved up can quell any fears they may have about approving your refinance. The problem is that it can be difficult to see what the bottom line is if you’re constantly transferring money back and forth between accounts.
If you’ve set up regular transfers from your checking to savings, that could work in your favor since you’re growing your balance. There’s an issue, however, when you’re regularly pulling money out of savings and moving it somewhere else. This move could give the impression that you’re not very adept at managing your finances. When a refinance is on the horizon, it can be a good idea to take a hands-off approach so your statements reflect a stable balance history.
Compare mortgage refinance rates.
2. Making Large Deposits or Withdrawals
Pulling a lot of money out of your account is also another potential trouble spot. The bank might ask for an explanation and that could cause them to reevaluate your entire application. If you’re planning to make a big purchase in cash, you might be better off deferring it until after the lender gives your refinance the green light.
The same thing goes for suddenly making a sizable deposit out of the blue. If your balance increases overnight by thousands of dollars, that’s something the lender’s going to notice. Even if there’s a good reason – such as a relative or friend gifting you money for closing costs – the bank may still have concerns over your ability to repay. If you have to make a large deposit for any reason, it’s a good idea to be prepared to explain why and to provide supporting documents if you have them.
Try using the free SmartAsset closing costs calculator.
3. Opening or Closing Accounts
Again, lenders want to see a certain degree of continuity when it comes to your banking habits so in the month or two prior to refinancing, you might want to steer clear of opening new accounts or closing old ones. Sure, there are some great account opening bonuses to cash in on these days, but if you’ve got five or six different accounts at several banks, your lender could wonder why you need so many.
Closing accounts is also probably a bad idea, especially if they’ve been open for a while. While closing an account won’t hurt your credit score the way getting rid of a credit card would, the bank isn’t likely to look on it favorably. If you don’t have statements for your new account showing where the money went, that could work against you when you apply for a refinance.
Final Word
Refinancing can save you a lot of money in the long run if you’re able to lower your interest rate or reduce your payments. How you manage your bank accounts prior to and during the refinance process can determine whether your loan application gets the seal of approval.
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