With interest rates at record lows, many financially savvy Americans are considering a home refinance. The time might be right to jump on such an opportunity, as it can save significant amounts of money every month. Moreover, for the first time in a while, with housing prices beginning to rise in many markets and helpful government programs like HARP, you may find that your home finally qualifies for a refinance with a lending worthy debt/equity ratio.
The refinance process, though, can be quite tricky and is essentially the same long process that unfolds when buying a home with a mortgage in the first place. The only easier part in a refinance vs a purchase, is that you do not have to actually find a home to buy, or deal with negotiating with the seller, or run through all the various inspections. Aside from that, though, anticipate the same rigorous process from the lender to determine your credit-worthiness and your general risk. The lender will ask for income documents, tax returns, bank account statements, and an appraisal of the property. Many times this can get annoying as there always seems to be something else the lender wants.
When you begin to get discouraged, though, step away and keep your eyes on the prize. This refinance could save you hundreds of dollars a month and thousands of dollars a year! Power through the rough patches and the constant need to find paperwork. Also (of course) come back to this step by step set of instructions or email us with your questions.
Step 1: Get Your Paperwork in Order
I suggest starting with this step first. Find all the paperwork for the following items and put them in an electronic folder on your computer, in your Dropbox account, or (if you are old fashioned) in an actual physical folder. This will keep things simple later, and your lender will appreciate your promptness. Most importantly, you can rest easy knowing that the hard work is done. Do be prepared to send updates as new statements become available, but by starting with the grunt work first, you will minimize the time later. A lender will want to see official statements from the following accounts:
1. Checking and Savings Account Bank Statements
2. CD and other “cash” accounts
3. Last two months worth of pay stubs. If you are a married couple, and you are both applying together, be sure to have this information for both of you.
4. Look up your credit score. This is not formally required by the lender (they will most definitely run it themselves) but it is good for you to know in advance. Two free sites are creditkarma.com and creditsesame.com. You can also get a free report from the three official lenders once per year. Avoid at all costs signing up for credit monitoring services. These can often cost $15-$30 and is not worth the expense. You normally need a 740 score to qualify for the best rates.
5. Current Mortgage Statements. This is used to see your current payment, escrow, and payment history.
6. Last Two Years of Tax Returns.
7. Last Two Property Tax Statements for the home in question.
Lenders may also want to look at brokerage accounts and retirement balances too, but generally they are most interested in cash as it is how you will fund the closing.
All of these documents are used to determine if you can 1) afford the monthly payment 2) are credit worthy and 3) figure out what the new lender will require in your monthly payment. If you are not good at keeping records this may take more time, but you can usually find all of the information online. Even tax returns and property tax statements can be requested from the government, although the process will of course take a bit more time for them to arrive.
Step 2: Contact Banks or Mortgage Brokers
There are many places you can go to get a home loan. Heading directly to a bank will sometimes ensure you get the lowest rate (as you can easily shop around between banks) but will lock you into doing business with just that bank and they may have some slightly eccentric reason for denying you. An easy way to browse rates is a site like bankrate.com. A mortgage broker will charge you a few more fees but are highly motivated in getting you the loan as otherwise they don’t make any money. They will shop your loan around to a variety of banks and will get you a competitive rate too. You can easily get a lot of mortgage brokers by going to sites like LendingTree.com.
Step 3: Decide on a Bank or Broker
Ultimately, you can only go down the loan process with one party, so decide which bank or broker you are most comfortable with and begin the process. You will know it is serious when they run your credit and you fill out an official loan application.
Step 4: Fill out Loan Application and Other Documents
The Loan Application will be somewhat serious looking and require lots of financial information and signatures. Typically, the lender will fill in most of the information for you based on the documents you submitted and you just have to sign. Still, read the fine print and make sure everything looks as it should. Spend time on it and ask questions.
Step 5: Schedule The Appraisal
This may come before step 4 if there is suspicion your home is not worth enough money to qualify for a loan. With the decline in values over the last few years this is often times the biggest hurdle to get over. Lenders usually want at least 10% of ownership in the home. So, the loan amount can only be 90% of the appraised value of the home. There are government programs like HARP and HARP 2.0 that will allow a refinance even at 125 of home value. The broker or bank should know if this is possible on your property and if they don’t know about it, it may be time to look for a different lender.
Step 6: Follow Up With More Paperwork
After the application and appraisal the lender may require more paperwork, including updated pay stubs. Keep these things organized and send them whatever they need.
Step 7: Read and Sign the Good Faith Estimate
You are in the closing stages now, congrats. The GFI is a list of all the charges and details about your loan. It will also include the final amount of cash you will need to bring to the closing. Have your lender or broker walk through it with you and ask any questions. You may find you have to bring money to the closing even if it was “no cost”. This is typically done to fund your next loan’s tax/escrow account. Do not freak out, as this does not mean you have been swindled by the broker or bank. The new loan needs some cash in the escrow account for when the tax bill comes. You will get the accumulated money in the old escrow account about 3 weeks after the loan closes, often times canceling out any money you had to bring to the closing. There will, though, always be some fees including the appraisal fee, credit check, and loan origination charges. If you are saving enough on the monthly payment relax and keep the big picture in mind. These are small fees that will save you big money over the long haul.
Step 8: Schedule the Closing
Many times the closing can take place in your home. A notary will come to your house and you will sign all the documents and give the money order if cash was required to close the loan. Rest up as there will be a lot of forms to sign. When it is all over, celebrate! This is the end of a somewhat long process that will save you a lot of money over the long haul!.