There are solid reasons for refinancing a mortgage these days for those who have increased income, improved credit, and built home equity. The rates may still be better than those you settled on the first time around. For those who have already done their homework and are ready for refinancing, there are plenty of bureaucratic icebergs that can scuttle your plans. Here are the top two doozies, and what to do before you refinance:
Challenge #1: Inadequate Preparation
Here you are at LendingTree. You just want to fill out a few forms, press a few buttons, and BANG, you're done refinancing. You have some solid, competitive offers on refinancing. Still, the lenders want paperwork on your income and your credit. It can take time to get it all together, right? Do you really have to?
You do if you want new financing! Underwriters make recommendations on applicants based on verifiable documentation, not a warm handshake. Get ready to submit:
- Proof of income
Lenders want to see the last two years of federal income tax returns and accompanying W-2s from employers. Expect to also provide recent bank statements, pay stubs, and the original mortgage documents. Self-employed applicants should use a statement of profit and loss for the year, along with required tax returns, bank statements and mortgage documents.
- Credit scores/history
Applicants must provide credit scores and credit history. They can get their free credit score here at LendingTree. Applicants with credit scores and history that have improved since the original mortgage might obtain better rates. In any case, they must be reported. Note: The lender will pull this information for you, but it's good to be prepared and know your score and view your report in advance so you can take care of any errors.
Challenge #2: Inadequate Equity
The next challenge the borrower faces is whether they have sufficient equity (reported as loan-to-value ratio) to satisfy underwriters. Consumers seeking conforming loans meeting Fannie Mae and Freddie Mac requirements typically must meet a LTV ratio < 80 percent. For borrowers with a higher LTV ratio, there may be refinancing alternatives, but expect to pay private mortgage insurance to offset the risk assessed by the underwriter.
- Pay more up-front and each month
For those who can't meet LTV ratio requirements: get a smaller loan amount by increasing a down payment, paying extra on the principal every month, and foot the bill on private mortgage insurance. It may ultimately be tough to gain any advantage in refinancing, particularly if you don't plan on living in the home for a long time. LendingTree's Refinance Calculator gives consumers an analytical snapshot of their potential savings based on variables such as current mortgage, original amount, balance, age of loan, and both the respective loan rates and terms. It also provides a break-even analysis of savings on monthly payments, costs savings over the term of the mortgage, and the increased number of monthly payments.
Look into HARP
The Home Affordable Refinance Program, HARP, was created in 2009 to assist homeowners with negative or no equity to refi with loans backed by Fannie Mae or Freddie Mac. HARP guidelines are much more lenient on credit scores, home valuation, and income requirements.
Note: The HARP streamline program expires on September 30, 3017.