With paperwork, credit verifications, and even getting finger-printed, refinancing can be a daunting process. And with mortgage interest rates often rising from one week to the next, a stall during the refinance process could cause you to land a higher rate than expected.
So what can you do to make refinancing as seamless as possible?
While there are hiccups in any process, Bruce Ailion, an Atlanta-based attorney and certified real estate broker, says one thing that’s helpful is gathering all necessary paperwork in a timely manner.
Below are more detailed tips on how to make the process go as smoothly as possible…
Be Prepared to Source Monetary Deposits
When getting together your refinancing documents, chances are you'll end up needing some unexpected paperwork - like letters of explanation - says Kelly Resendez, senior vice president of sales and business development for Paramount Equity Mortgage.
That's because an underwriter cannot take information provided in a loan application at face value or make assumptions, Resendez explains. Instead, underwriters are now required to obtain letters of explanation on everything - from why you are purchasing a home to what the source of deposits are into your bank account, Resendez adds.
Jon Lamkin, vice president of mortgage lending at Guaranteed Rate Inc. agrees, adding that banks now require borrowers to show the source of funds for any deposits made that are not payroll checks.
"And this can get very frustrating when clients have to source gifts from Grandma and Grandpa or expense checks for work," Lamkin adds.
So, to avoid any delay in the process, be prepared to submit an explanation of the source of any money deposited into your account.
Don't Change Jobs Before Your Loan Is in the Clear
Are you ready to hand in your two-week notice? If your loan hasn't closed, don't do it just yet.
Why? Because changing employment can potentially delay your closing, according to Ailion.
"Lenders look for stability," Ailion explains. "While there is no guarantee you will have a job a month after you close a loan, if you've been with the same employer for five years the expectation is that you will be there tomorrow," Ailion says.
In fact, loans are sometimes re-verified after closing - meaning they make sure you're still employed. And when that happens, you want the lender to find you working at the same place, Ailion says. So how long should you stay in that job after closing? "A couple of weeks to be safe," he says.
What if your job change is in the self-employment route? You may want to hold off on that dream until after the loan is finalized.
"I recently had a client go from a W2 employee to a 1099 and then apply for a refinancing, and this is a big no-no," says Lamkin, who adds that you need to show two years of 1099 income to qualify for refinancing.
"If you have less than two years of self-employment income, that new income will not be allowed and your refinancing might be denied," Lamkin says.
Check Your Credit Report Six Months Prior to the Refinance Process
If your credit report has an error, it can be detrimental to securing a low interest rate - if you can qualify at all.
"In addition to potentially affecting what program and rate you qualify for, having an incorrect credit report could cause your loan to be denied, as an underwriter will not be able to read your credit report accurately," Resendez says.
Surprisingly, Lamkin says it's usually the smallest of credit issues that are most common.
"Old cell phone contracts, $20 medical co-pays, and disputes with a credit agency are the items that usually need to be fixed," Lamkin explains. Even something as small as $10 can hurt your credit if it is not paid in full, Lamkin adds.
So how do you fix errors in your credit report? Ailion says it could be as easy as picking up the phone and calling the reporting agency to let them know of the error. "Credit bureaus are regulated by federal law and are generally good at complying with those laws," Ailion adds. One thing to keep in mind: It can take two to six months to clean up a poor credit report, so the time to start working on this issue is prior to having an immediate need to refinance, Ailion says.
Don't Buy Anything That Requires You to Take Out a New Loan
If you've been thinking about purchasing a new car, you may want to hold off until your refinance is in the clear. Why? Because making a big expense could affect your debt-to-income ratio and as a result, halt your refinance qualification.
To clarify, your debt-to-income ratio is the amount of debt you must pay each month (including any car or student loans, credit card debt, and your anticipated new mortgage payment) compared with your gross income (before taxes).
The acceptable debt-to-income threshold will vary by lender, but to give you an idea of what to aim for, the Department of Housing and Urban Development says that the debt-to-income ratio for an FHA refinance cannot exceed 43 percent.
Still having a hard time understanding what your debt-to-income ratio might be? Check out this example:
Let's say you have a gross monthly income of $4,000, and your monthly debts include a $200 monthly car payment, a $200 credit card payment, and a (projected) refinanced mortgage payment of $1,200. With these numbers, you have a debt-to-income ratio of 40 percent.
Now, let's say you decided to buy a new convertible, and it has a car payment of $400 per month. That'll bring your debt-to-income ratio to 50 percent - which means you may jeopardize your loan qualification.
The moral is that you may want to save the joy rides in the new convertible until after you close on your refinance. And remember, debt-to-income ratios will vary by lender, so make sure to shop around and conduct the necessary research.