The decision to refinance your home is a personal one that can affect your family’s finances for years to come. After doing all the research to determine a new mortgage is right for you and seeking out referrals from friends and trusted advisors, you’re ready to start the process. You just don’t know what the process entails, especially if this is your first mortgage refinance. Three aspects will drive the refinance process: company, credit and collateral. Your Mortgage Company Finding the right lender is a major part of the refinance process. Yes, you should find a mortgage representative with a good personality and solid industry experience, but the person you work with is only a small piece of the equation. The company they work for is every bit as important. Mortgage lending companies make money through the fees and interest they charge you; however, the company takes on a high level of risk by writing a check on your behalf for what could be hundreds of thousands of dollars. To protect that investment, lenders design policies and guidelines to detail how they’ll do business with borrowers in addition to federal regulations governing their actions. These underwriting guidelines determine whether you receive a mortgage approval or decline. A lender with strict or tight underwriting guidelines will require more documentation from you than a company with looser requirements. For example, Lender A may ask for complete tax returns for the last three years, while Lender B requires only your current paystub and most recent W-2’s. Your Credit History Your credit score is a major player in the refinance process, just as it was during your initial mortgage application. After you submit your mortgage application, the representative inputs everything into the system and transmits it to his or her underwriter. The underwriter †unless the representative has authority to do so †pulls your credit and reviews the information. The initial credit review can be instantaneous or take weeks, depending on company guidelines and the information in your credit file. Although the credit score is often what determines your approved interest rate, it is not the only piece of information reviewed. All of the data comprising your credit score is valuable information for your mortgage lender and they consider each piece in turn. How much open credit do you have? A high credit score is a good thing to have, but the way you use your credit is just as important. Let’s say you have 10 credit cards, each with a credit limit of $1,000, and no additional credit lines. This gives you a revolving credit limit of $10,000. There are two ways these credit lines can hurt you: â€They’re all maxed out. Lenders like to see the responsible use of credit. If you have a total limit of $10,000, use no more than $5,000, but $3,000 is better. Operating at your maximum credit limits spells financial disaster when emergency expenses strike or your income decreases. â€They’re all at a zero balance. Typically, this is a good thing because it can mean you live below you means, but it will make your lender question why you need so much open credit. It also makes them wonder if you plan to charge up the balances after you close your refinance, potentially making it difficult for you to afford your new mortgage payment. What kind of credit do you have? You’ve heard it said before, but it bears saying again: Not all credit accounts are equal. Excessive credit card debt is the kiss of death to your mortgage application, while student loan debt isn’t an issue while it’s in deferment or as long as you make your payments on time. Lenders associate one kind of credit with frivolous purchases and the other with investing in your future income potential. Your Collateral’s Condition Once you receive a credit approval, it’s time for the mortgage lender to focus on your collateral. In this case, your home is collateral. Value and title are the key elements lenders focus on during the refinance process. From a value perspective, you must not owe more than your home is worth. When this occurs, the lender will decline the refinance because it’s too risky. The lender can use a variety of appraisal methods to determine your home’s value, including: â€Tax value â€Market analysis â€Full appraisal If your home passes the appraisal, your lender must verify a clean title to the property. This is easier for a refinance than a purchase because you already own it, but liens for unpaid property taxes and homeowner association dues can cause problems. Lack of flood insurance when in a flood zone will also bring the process to a halt.
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