I recently went through a refinance, and it was a bit brutal. If you are thinking about refinancing, you need to be ready. A refinance is another type of home loan. And, since it takes the place of your first mortgage by paying it off, it also means that you have to go through many of the same hoops endured for the original mortgage.
Here are 4 tips that can help you successfully navigate the refinance process:
1. Check Your Credit
The very first thing you should do check your credit. The lender is going to want to see your credit score before lending you a large amount of money. Pull your credit report (start at AnnualCreditReport.com), and consider paying for your credit score. You need to know where you stand. If there are any problems, you need to have them fixed. If your score is low, do what you can to improve it before you apply for your refinance.
2. Get an Appraisal
In many cases, you need an appraisal to qualify to refinance your home. The lender will want to know that your home is worth at least the amount that you borrow. Many lenders prefer that the refinance loan amount to no more than 80% of your home’s value. So, if your home appraises for $200,000, you might not get approved for more than $160,000 for your refinance. If you owe more than that, you might not be approved. Keep this in mind, since you might have to look for a more flexible lender, or see if you qualify for a government refinance program that will help you refinance even though you owe more than 80% of the value of your home.
3. Gather Your Documentation
Know, ahead of time, what documentation you will need for the process. Most lenders want to see documentation that establishes your income, as well as bank statements that show how your cash flow is managed. This documentation can include pay stubs, past tax returns, bank statements going back 60 to 90 days, and more. You might even be asked to provide documentation of other assets, such as what you have in a retirement account or an investment account.
The faster you provide the needed documentation, the faster your loan can be approved -- and the faster you’ll close. Knowing what you need ahead of time can speed things up. Get what you need, and find out who you need to contact about your current loan. Often, your new lender will need a payoff amount from your old lender.
4. Save Up
Chances are that you will need to pay some out of pocket expenses for your refinance. Loan origination fees are almost always a part of the process. You might also decide to pay points in order to reduce the interest rate on the loan. And, if you are stuck on the loan-to-value ratio, you can offer a “cash in” refinance, in which you pay down some of your old loan in order to reduce what you borrow for the refinance.
A refinance is rarely completely painless. However, with a little planning, you can oil the gears a bit.