What you need to qualify for a refinance now
September 21, 2009 · Tagged with Loans
When you apply to refinance your mortgage, you must provide pay stubs from a recent month, two months of bank and other financial statements, two years of W-2s and, if you’re self-employed, two years of tax returns showing self-sustaining income. The requirement for all these documents contrasts with the “no-doc” or “liar” loans available during the real estate boom that allowed borrowers merely to state their income without providing proof.
You can take additional measures to speed up the process. Phoenix mortgage broker Tracy Tolleson urges his clients to fill out an application and pay for an appraisal (about $350) ahead of time. That can be particularly helpful if you’re delaying your application in order to lock in a lower rate. There is a brief lag in applications to lenders between the time rates drop and the point that lenders become swamped with new customers. With all your paperwork in order, you can beat the rush.
If you have a home-equity loan or line of credit, your current lender will have to document its willingness to “resubordinate” to your new first mortgage — that is, stand behind the first lender for compensation if you default.
Where should I apply?
Guy Cecala, publisher of Inside Mortgage Finance, recommends calling at least several lenders, including credit unions in addition to the local branch offices of national, regional and local banks. Cecala says some banks’ divisions that typically serve only a bank’s more affluent customers (say, with $100,000 or more in deposits) now offer good deals to non-depositors.
Also, check with mortgage brokers. They may prove especially helpful if your needs or qualifications aren’t straightforward, says Cecala. If your application is declined, good brokers, who represent multiple lenders, will appeal the decision or take the application to another lender that may approve it.
Should I lock in the offered rate?
Locking in a rate is a good idea for a couple of reasons. First, if the mortgage pushes the limits of what you can afford, you want ensure that rising rates won’t torpedo the deal. Second, the risk that rates will change before the deal closes is higher these days because loans are taking so long to process. Because mergers and layoffs have decimated many lenders’ staffs, refis are taking an average of 60 days to close. Locking in a rate will cost you, of course — lenders usually add a quarter of a percentage point to your interest rate for every 30 days you lock in a rate, up to 90 days. Be sure to get it in writing.
Of course, rates may decline further. To take advantage of that, ask about a “float down” option. For example, if rates drop a minimum of 0.25%, you can capture the lower rate before you close on the loan. Lenders will usually charge you a $200 to $300 nonrefundable fee for the option, but it can save you thousands of dollars over the life of the loan if rates go down.
How much equity must I have?
Fannie and Freddie require just 5% equity in your home (more for a second home, investment property or a mortgage with secondary financing). However, you must get private mortgage insurance (PMI protects the lender if you default) if you have less than 20% equity.
In markets where home prices are declining, the mortgage insurers won’t cover conventional loans with less than 10% equity or jumbo loans with less than 15%. But PMI can be expensive — the less equity you have, the more costly it is — and the added cost could disqualify you from refinancing.