The current trend of low mortgage rates offers plenty of opportunities for homeowners to refinance, cash out on their equity and switch to a loan term that serves their needs. But it is one thing to decide to refinance, and entirely another to succeed in it.
There are many reasons why some refinancing applications are turned down. The most common are unpreparedness and a lack of knowledge about the refinance process. To help you take away this hurdle, this article gives a brief yet concise overview of refinancing, the steps involved therein and what each requires of you from preparing the documents to closing.
Step 1: Prepare Right
First things first: Check your credit score.Lenders take a look at your credit scoreto determine if you are a safe investment. You can get your credit score from the three credit bureaus: Experian, Equifax, and TransUnion. A score of 700 is seen as a healthy credit profile. A minimum of 620 is the usual base mark for refinancing.
Your credit score not only determines whether you get the mortgage or not. It is also an important factor that influences the interest rate that your new mortgage will be offered at. The higher your credit score, the lower your interest rate will be and you will have the added advantage of having many options among lenders.
If ever you noticed that there is some discrepancy or error in your credit report, make sure to report it to the concerned bureau before you apply for a refinance. Many lenders will not begin the refinance process if there are any existing disputes with the bureaus.
Another important part of the preparation process is readying the documentsthat your lenders will most likely ask for the application process. These may include:
- A list of questions for your loan agent regarding the mortgage refinance process
- Bankruptcy papers (complete), if applicable
- Current mortgage statement
- Divorce decree or document of separation for divorced or separated individuals
- Explanation for any existing credit issues
- Financial statement from the past two months including bank accounts, investment profiles, and/or retirement account statements
- Insurance declaration page of current homeowners
- Inquiry letter explaining applications for any form of credit within the past 90 days
- Personal tax returns from the previous two years
- Two current pay slips
- W2 forms from the past two years
Once you’ve readied these documents, you are ready for:
Step 2: Finding the Loan That’s Right for You
And how do you do that? Use the following questions to guide you:
- Why do I need a refinance in the first place?
- Am I familiar with the various loan products offered and available today?
- How long have I owned the property in question?
- How long do I intend to keep this property?
- How much am I willing to invest and pay for this new loan?
Once you have answered these questions, you will now have a starting point to guide you on where and what to look. Do you intend to transition from an adjustable -rate mortgage to a fixed-rate mortgage? Looking to refinance to a shorter loan term? Willing to pay more each month for the sake of fully owning the home sooner? Shop around for options that correspond to your choices based on your responses.
Step 3: Apply for the Loan
Once you’ve completed the first two steps, you are now ready to file an application. See to it that all information you input are correct. Use the documents you have prepared in step 1 to make sure there is no glitch in your application. Reviewers are very meticulous when it comes to documentation and sometimes, even the simplest mistakes can cause the denial of the application. Once you have filed and submitted all required documents, confirm with the lender that s/he has everything s/he needs for the review of your application.
Step 4: Have the Property Appraised
The next step to follow is to order the appraisal of the property. The appraisal is necessary to know if the home you are planning to refinance costs what you expect, and if you have enough equity to support the loan.
During appraisal, present your home in the best light. Fix what might need fixing or make minor improvements. The appraiser will examine the condition of the property which will be the basis for the valuation.
An appraisal typically costs around $300 to $400.
Step 5: Going Over Underwriting
Once you have breezed through the previous steps without any problem, the completed application and appraisal will now be forwarded for underwriting. An underwriting officer will evaluate if you qualify for the refinance loan you are asking. Some additional documents might be requested at this step so be ready to deliver.
Step 6: Go Over Conditions and Review Loan Approval
If all things go right and the underwriter decides that you are financially capable of carrying the loan, then s/he will issue a letter of approval with a set of conditions you need to meet before closing. The letter of approval will document the terms of the loan that you had been approved for. Is this the term you expected to get?
Make sure to review and read the fine print. The same goes with the list of conditions you still need to comply with. See to it that you will be able to follow and forward what has been required. Need a guide? Let our lenders help you.
Step 7: Lock In Right
After you have reviewed the approval and conditions, you will be asked if you are ready to lock in on a rate. By locking in, you protect yourself from unprecedented rate hikes. The general lock in period is between 7 and 60 days. You are not required to pay for locking in upfront but the cost will be included in closing depending on the term of the rate lock. The longer you lock, the higher the amount that will be compounded in closing.
Locking in is tricky because if you are not able to close within the lock period, you may have to pay for lock extension fees or worse, lose your rate. Think about what might cause delays in complying with the conditions required as well as the time your lender might need to prepare your documents.
If you have a good estimate of these factors, you will have good chances of locking in right.
Step 8: Order Your Loan Documents
Before closing, ask your lender for the clarifying details of closing costs. Review the said documents carefully to ensure there will not be any problem during the actual closing date. Next, schedule the signing date and request for the preparation of loan documents.
Step 9: Signing
Congratulations! Now, you are in the final stages of your refinancing. During closing, bring necessary identification recordsespecially those issued by the government. Make sure to sign every page of the documents with consistency and with a clear understanding of the content of the papers.
Final Step: Closing
For certain types of refinances such as when the property is owner-occupied, you will be given three days to cancel. Contact your agent if this is the case. If you decide to go on, the closing process will move forward. The necessary funds will be appropriated, the refinancing process will be legally closed, and the agent in charge of the closing will forward the new loan to be recorded against the property.
In a few days, you will be receiving the official closing statement in the form of an HUD-1 form. Keep a personal copy of the documents for legal purposes.
Sometimes, the difference between success and failure in refinancing is the borrower’s preparedness. Make sure you are geared up and your efforts will pay off.
Ready to refinance? Talk to a lender today!
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.