Step One: Assemble Your Information
No matter where you go for your refinancing, they will all need certain information from you to verify employment, identification, credit and residential payment histories, etc.
You'll need to have:
last two years of W-2s (or tax returns if self-employed).
Last 30 days of paystubs
Documents showing other sources of income, which could include second jobs, overtime, commissions and bonuses, interest and dividend income, Social Security payments, VA and retirement benefits, alimony, and child support
These documents show the lender your ability to repay the loan. What lenders would like ideally is a stable to growing income (even if you've changed jobs) within the same career field. If you've changed careers or became self-employed within the last two years, this will likely affect the mortgage options available to you.
Social Security Number
This is used both to identify you and to obtain your credit history. Without a social security number, the lender cannot pull your credit and will not be able to provide you with an accurate quote.
A complete list of your creditors, such as credit cards, student loans, car loans and child support payments, along with minimum monthly payments and balances
This will be checked against your credit report to help lenders determine your ability to repay the mortgage. Typically if the total of your monthly credit obligations plus your new mortgage payment total more than 40% of your monthly income, your mortgage options may be affected.
Investment records including mutual fund statements, 401(k) plan, real estate and automobile titles, stock certificates and records of any other investments or assets
Borrowers who have assets such as 401(k) plans, etc. can often obtain better terms than those without any because the lender knows you have reserves in the case of an emergency. For marginal borrowers, it can often mean the difference between a "yes" and a "no," so be sure to document any and all assets.
A recent mortgage statement or stub
To a lender, your mortgage history over the last two years is one of the most important factors in determining your eligibility because it is the single best indicator of how you will pay your new mortgage. Even if your credit card or other debt payments have been late, if you have kept your mortgage payments up to date, you can often qualify for good interest rates.
Step Two: Check Your Credit
It's a step that may seem obvious, but it's often surprising how few people actually take the basic step of checking their credit prior to applying for a mortgage.
Though you may have never missed a payment in your life, your credit report may not be perfect. Between reporting errors and today's threat of identity theft, you do not want to find out about mistakes on your credit report after you were denied financing.
Even if your credit isn't perfect, you can often improve your credit score by challenging items which appear on your credit report. Some credit reports contain duplicate items so that you are being penalized twice for a single late payment. Many creditors will also work with you to remove past negative items from your report if you have been a good payer since those late payments.
What if you can't improve your credit score? You'll have more realistic expectations for your financing options. If you know what challenges exist on your credit report, then you can select the lenders that specialize in working with people in your situation and together you'll be able to address those challenges right from the beginning rather than trying to scramble at the last minute after you've already signed a purchase contract.
To get a copy of your credit report, we have found several options for you. Just go to our Credit Reports Section (link opens in new window) and select one.
Step Three: Figure Out Your Primary Goal
Staying focused is an important part of a successful refinance, so before you go shopping for lenders you'll want to figure out what your goal is. Are you trying to consolidate debts? Make home improvements? Cash out equity? Reduce your interest rate? What is your #1 goal that you're looking to accomplish when you go to closing?
The reason it's important is that some mortgage options make more sense if you're trying to consolidate debts while others are more appropriate if you're trying to cash out equity. This doesn't mean that you can't accomplish two or more goals such as consolidating debts and doing a little home improvement. But what if you have to choose between them? Which would make the bigger difference: having your debts consolidated or doing the home improvements? Sometimes you will be forced to make a choice due to limitations in the amount of equity you have available, because of past credit problems, or for some other reason.
Make sure that you have that answer in mind before going any further. Letting potential lenders know your primary goal upfront will help them select the most appropriate mortgage option for you.
Step Four: Know Your Timetable
Is your roof falling in? Are you about to be foreclosed upon? Is the repo man waiting around the corner? Situations like these call for extremely short timeframes from your lender. That means one of most important things you need from a lender is quick turnaround: the ability to get your loan to the closing table as soon as possible. Lender A may be able to get you a half percent better interest rate than Lender B, but if Lender B can close your loan before your deadline while Lender A can't, then their better interest rate is meaningless and Lender B is the best option for your needs even though their rate may be slightly higher. When you go looking for lenders, their ability to move rapidly and pay off your creditor(s) is going to be your top concern.
Knowing your timetable is still important even if refinancing isn't a dire emergency. But if speed of closing isn't your top concern, then the timetable that becomes important is knowing how long you plan to stay in your home. While no one can say with absolute certainty, you probably have a good idea how long you are planning to stay in your current home, or more specifically, how long you are planning to keep your new mortgage.
Every refinancing has costs associated with it. Even a "no closing cost" loan has costs: the cost is simply built into the interest rate you're paying on the loan rather than explicitly paid at closing out of the amount financed. Which option makes more sense for you: to have the closing costs rolled into the interest rate or paid out of the mortgage at closing? If you plan to be in the new mortgage for a short time, having your closing costs included in the interest rate makes more sense; while if you plan to be in the new mortgage for a long time, it makes more sense to have the closing costs paid out of the loan amount.
A quality lender will ask you these questions, so you should be prepared with answers that you've had a chance to think over. The way the closing costs for your mortgage refinance are structured will depend on your answers, and having the wrong structure could end up costing you money in the long run.
Step Five: Get Quotes and Compare Offers
In today's marketplace, you'd be doing yourself a grave disservice if you didn't get multiple lenders to give you quotes. There are too many options and too many specialized lenders to go with the first one to whom you talk.
If you've completed the first four steps successfully, then combined with the tools you have here you'll have everything you need to make a smart decision. Simply, choose a mortgage refinance quote source (link opens in new window) or two and fill out their online applications. When they contact you, provide the answers that you determined in the previous steps and the lenders will have what they need to provide you with the quotes you'll need to make a decision.
Once you've been contacted by the lenders, use our mortgage calculators (link opens in new window) to compare the offers. Make sure that you keep your short and long-term timetables in mind, and remember that if three lenders are telling you one thing while the fourth is telling you something completely different: the odds are that the fourth isn't telling you the truth. If it's sound too good to be true, then it most likely is. If you find that the offers are very similar, then the decision will boil down to which loan officer with whom you feel most comfortable working.
Step Six: Work With Your Lender
Once you've chosen a lender, there are several things which will occur. First, you will need to send the documentation you assembled in Step One to them. They will use this information to obtain a pre-approval and to pre-fill the legally required mortgage documents.
They will then send these mortgage documents to you, and the packet will most likely be somewhere around twenty to thirty pages in length. Of these, only four are the actual standard loan application. The remainder are state or federally-required disclosure documents related to non-discrimation in lending, borrower rights, terms of the mortgage, etc. Make sure that you read through them and call your lender with any questions prior to signing them and sending them back.
The lender may require some additional information beyond what is listed in Step One. This isn't necessarily unusual or a cause for concern. Often underwriters will require clarification of items on a credit report, explanations of job changes, or the like. Make sure you respond to requests for additional information as quickly as you can to avoid delaying your refinancing.
You will also probably be required to have an appraisal performed. Some lenders will pay for the appraisal, or you will be required to pay for it directly. Keep in mind that even if the lender pays for the appraisal upfront, the cost incurred is the same either way as the appraisal cost will then become be an explicit cost taken out of the mortgage amount or included in the interest rate you will be charged. How you decide to pay for the appraisal is a matter of your personal finances and what makes the most sense for you.
Step Seven: Go to Closing!
Unlike purchases which require purchasers, sellers, and agents to meet on a certain date at a title company or in a real estate office, refinances are often closed in the comfort of your own home. Because typically the only limitation on the timing of a refinance closing is the expiration of a locked-in interest rate, there is usually much more flexibility in the scheduling of a closing date.
In most cases, a title company will send a notary public to your home where they will be required to certify that you have signed each of the forms in the appropriate place. Before you sign anything at closing, be certain that the terms are identical to what you and lender had discussed previously. If there are discrepancies, do not be afraid to refuse to sign the documents as you are not required to do so just because they sent someone out to your home. You cannot be charged any money for that visit, and it is far more important to make sure the documents are correct.
After you sign the closing documents, make sure the notary leaves you a copy of each of the documents you signed as well as a blank Right of Recission form.
The day after you close, take another opportunity to review the documents you signed. In almost all cases, you have what it called a three-day right of recission. This means that if you missed something - additional fees, incorrect interest rate - or if you just change your mind about refinancing at all, you have the right the rescind the refinancing. By filling out the Right of Recission form and sending it to the title company which is handling the settlement, you can void the closing within three days.
Once the three-day recission period has passed, your loan will fund. At that point, the lender will wire the money to the title company who will then pay off the old mortgage (if that was part of the refinance transaction) and disburse any checks which were scheduled to be cut. For example, if you were paying off your car loan, your credit cards, and getting $1,000 in cash, the title company would send checks to the auto finance company and your credit card companies and will send you a check for the $1,000 at this time.
Congratulations on refinancing your home!
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It's never been more popular to refinance your home, nor more confusing. Navigating your way between all the offers and options out there takes a solid mortgage refinancing guide to help you through the process.