A clear picture of your current financial situation is as essential now as it was when you first purchased your home. The more organized and aware you are before starting the mortgage process, the more likely you’ll be to successfully refinance.
Do you have enough saved to cover closing costs?
When you refinance, you’re replacing your original mortgage loan with a new one. This means you’ll once again need to pay closing costs, which typically average between 2% and 3% of the loan total. While you may be able to roll these costs into your mortgage balance, you’ll have to pay interest on them as a result, increasing the amount you’ll spend over your loan term.
Have you kept up with home repairs? Do you have enough savings to spruce things up?
Most refinances require an appraisal of the current value of your home. Just as you learned when purchasing the property, normal wear and tear as well as a need for major repairs will reduce the appraised value. This will eat into any equity you’ve amassed in your home and can make qualifying for a refinance more difficult.
Do you know your debt-to-income ratio?
Lenders typically consider your outstanding debt—from revolving debt in the form of credit cards to student loans, car loans, and personal loans—when approving or denying your mortgage application. If you have too much debt in relation to your income, it will have an affect on the type and amount of mortgage you qualify for. If your savings allow, you may want to consider paying off smaller debts to improve your debt-to-income ratio before you submit a refinance application.
Have you checked your credit score recently?
Used by lenders to analyze your creditworthiness, credit scores range between 300 and 850 and are based on your credit history including the number of accounts you have open, how much you owe, late payments, and other factors. The higher your credit score, the less risky you appear to lenders and the better offers you receive.
Reviewing your credit report and score now will help you avoid any unpleasant surprises and get an idea of interest rates you may qualify for. Your bank or credit card company may allow you to review these as a free benefit. If not, it’s possible to purchase your credit report and score from a service such as FreeCreditReport.com, Credit Karma, or directly from one of the three major credit reporting bureaus.
Your credit score is just as important when refinancing as it is when purchasing a home. If you want the best deal possible, make sure your credit score is as high as possible before you start the process. And because of today’s challenging economic environment with high unemployment and job losses, organized finances are absolutely essential if you want to refinance successfully. The hoops borrowers need to jump through have increased, including higher credit score requirements for everyone and additional revenue, expense, and income documentation for the self-employed.
Underwriters are also verifying borrower’s employment the day of closing instead of ten days before and any financial documents you submit will be valid for only 60 days rather than 120 days. If you fear you may be facing a job loss or reduction in pay in the future, you should attempt a refinance as soon as possible.