When you are ready to refinance your home, you may find yourself struggling to stay afloat within an endless sea of vague and unhelpful information. Refinancing your home requires a considerable amount of research and preparation in order to ensure the process is as straight-forward as possible. We have put together a quick and thorough plan that will help clear the air of confusion when you are preparing to refinance your mortgage.
Before you start preparing to refinance your home, it is important to ensure you are completely ready. There are a few questions to ask yourself before diving into your refinancing preparation.
It is important to understand that the ideal refinancing candidate has ten to twenty percent equity in their home (this will help you avoid having to pay private mortgage insurance), a steady income, and a FICO score of 740 or better (keep in mind borrowers with lower FICO scores may still qualify for Federal Housing Administration (FHA) Mortgage through a bank or credit union).
If you answered “yes” to the question above, that is great news! Head to question two. However, if you answered “no” or are unsure, there are a number of helpful tools out there that can provide you the information you need to make an informed decision.
In order to refinance your home, you must first get your home appraised. A home appraisal is required for nearly* every mortgage refinancing option, because they allow a new lender to understand the value of the property they are being asked to finance.
Before appraising your home, it is vital to conduct your own research and be prepared for the appraisal. This preparation may include repainting the walls, or replacing old, outdated decor in order to receive the best possible appraisal. Many realtors state that it is very wise to put together your own mock appraisal packet on your home to present to the appraisal specialist. This should include a list of upgrades and features in the home - explaining your estimated value of the home. This will help them understand that you are well-educated in the real estate world, and will often increase the likelihood of your home being appraised for the amount you had expected.
Tip: Most home appraisers will not provide any information (not even a ballpark estimate) on the value of your home without receiving payment up front. If you are just simply pondering the idea of refinancing your home, and do not fully go through with the idea; receiving a professional home appraisal can be expensive.
Often times you may consult with a real estate agent, and they may be able to perform a comparative market analysis of your home to find an estimated value of your home. This can be helpful when deciding if refinancing is right for you, but remember, you will need a professional appraisal if you follow through with refinancing.
Much like when you initially bought your home, mortgage refinancing requires a lot of paperwork and records to be provided. It is wise to ensure you have all of this together beforehand, because if you don’t, it can severely hinder the forward movement of the entire process.
Here is a list of the common required documents you may need when you start your refinancing journey. Although, you should always ask your lender exactly what they require.
Pay Stubs - These will be used to ensure you have a steady flow of income. Many lenders will require at least 3 months worth of paystubs. Be sure to have these ready.
Statement of Assets - Alongside pay stubs, most lenders will require a statement of assets. This is to ensure you have enough money to cover the initial closing costs of the refinance. Some lenders may also require you have enough money saved to cover at least the first two months’ mortgage payments.
Tax Return Information - Be sure to have at least two years of your W-2 and/or 1099 forms. Lenders will review these documents to verify your employment, and understand trends within your earnings.
Credit Report - While most lenders will run their own credit check on an applicant, it does not hurt to acquire your own credit report. This will allow you to make improvements to your credit score before refinancing (if needed), and will also show your lender that you are well informed and responsible.
Outstanding Debt Statements - Most lenders will require documentation of any outstanding debts you may have. This includes your existing mortgage, auto loans, and even student loans.
This could very-well be the most important question when it comes to preparing for a mortgage refinance. It is important to look at the big picture. Understand the in’s and out’s of your new mortgage options.
For example, many mortgage options may be advertised with a lower interest rate - yet, they fail to mention their included fees may be significantly higher than your old mortgage. Meaning you really won’t save much - if anything at all.
It is important to know exactly what you are getting yourself into when preparing to refinance. Sit down and calculate the new mortgage’s interest rates, fees, and the time it will take to pay it back. Do these calculations match up with your original reason for refinancing? If so, then you are on the right track!