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Why Refinancing Isn't As Easy As You Think

Scott Sheldon

Homeowners who haven't gone touched their mortgage in recent years are often astonished at the amount of paperwork they'll need in the refinancing process today. If you haven't refinanced or gotten a mortgage in the past five years, here's what you need to know to get up to speed.

Paperwork to Compile

Scrounging up supporting documentation for your application is most applicants' least favorite thing to do, but it's unfortunately necessary in order to be granted a mortgage refinance.

If you're a W-2 employee, you'll be expected to provide the following:

  • Past two years' federal income tax returns
  • Past two years' W-2s
  • Your most recent 30-day pay stubs
  • Your bank statements/asset statements for the past 60 days
  • A copy of your current mortgage statement

If you are self-employed, you'll be expected to provide the following:

  • Past two years' federal income tax returns
  • A year-to-date profit and loss statement
  • Bank statements/assets for the most recent past 60 days
  • A copy of your current mortgage statement

This is the minimum documentation your bank, mortgage lender or mortgage broker will need before they begin unraveling your finances. Make no mistake, getting a mortgage these days is a documentation-heavy process and is necessary to show you meet the federal ability to repay requirements.

What Happens in Mortgage Underwriting

The mortgage process involves creating, documenting and structuring a loan package, and presenting the file to a decision-maker who ultimately will approve the loan, deny the loan or suspend the loan. Loans with obstacles are generally not denied, but are rather suspended with an exact reason — such as the borrower's debt-to-income ratio being too high, having a previous foreclosure or a slew of other possibilities. A suspended loan is simply a need for more documentation or a need for clarification of a specific problem. If the problem can be corrected, the loan can still move forward. Here is the loan flow:

Loan Package Submitted to Underwriting

Loan Approved With Conditions

Conditions Come in From Borrower & Resubmitted Back to Underwriting

More Conditions Added or Loan Is Final Approved

Final Approval/ Clear to Close

Docs Ordered

Sign Docs

Fund & Record

Once your lender submits your loan to underwriting, "prior to doc" conditions are created. These "prior to doc" conditions generally require more administrative paperwork from the borrower in order to get final loan approval (i.e. the green light for closing). This might mean providing additional pay-stubs, additional bank statements, a profit and loss statement showing the income consistent with the tax returns, or addressing questions underwriting might have regarding the financial documentation you presented. Think of these conditions as the final missing gaps of clarity needed to complete your loan review.

Where Challenges May Arise

The most difficult stage in the home lending process is when documentation is submitted to underwriting — it can create more conditions, more questions and further needs to provide more documentation. Until the condition information is deemed acceptable by the loan underwriter, the requests to you for more information can be continual.

A good mortgage lender will perform its due diligence in the originating of your mortgage refinance. This includes thoroughly reviewing any documentation supplied by the consumer before it's set in front of the decision-maker, in an effort to make sure the information supplied fully satisfies each condition. Be informed. Loan officers are not underwriters. Loan officers, loan processors and operational support do not make credit decisions on behalf of the lender. The final decision-maker is the underwriter — always was, always will be. A good rule of thumb is to work with a loan professional that either has underwriting experience or can demonstrate their specific knowledge in underwriting guidelines.

Working with a skilled mortgage originator can greatly help mitigate the back-and-forth communication consumers may find difficult or annoying when applying for a mortgage or a refinance. A consumer may say, "All I want to do is refinance my house and save $300 per month and get out of PMI and I have to go through all this rigmarole over documentation?" While understandable, the heavy documentation can be justified. In almost every instance, it's worth providing the documentation and going through the conditions with your banker in order to financially benefit. A one-time supply of documentation and questioning in exchange for a long-term financial benefit is really what it boils down to.

The homeowners who find the mortgage process daunting tend to be the ones who have not refinanced in years; while their previous refinance experience was likely simple and quick. The old concept that working with your current bank or current lender is somehow going to be easier is also generally not the case, either. Don't be fooled. Banks want your business, especially the bank in danger of losing your payments when you refinance them away. Lending, for the most part, is a level playing field. Loan providers want the same supporting documentation, and your current servicer does not save this information. Additionally, no mortgage company has a monopoly on the market, although some banks my offer expanded credit criteria, such as needing less equity for example, but at the cost of either more income, less debt or perhaps an ultra-high credit score. (You can get your credit scores for free on Credit.com if you're not sure where you stand.)

Essentially, the more organized you are from the start can potentially help you cut down on the additional paperwork and questions in the processing of your refinance. Make sure to provide all financial documentation and explain all details to your lender so they can properly structure your loan with the best possible combination of rate, costs and benefits.

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