Preparing to refinance is much like preparing to buy a home. In both cases, borrowers must provide a mountain of documents in order to qualify for that new loan. This includes collecting past statements of income, tax returns, credit, debts and additional assets. Understanding and collecting all of these documents can be intimidating.
But to help you get started, here is a brief rundown of the documents you might need when beginning a refinance.
1. Pay Stubs
When applying for a refinance, your lender will need proof of income. Lenders want to ensure that you have the financial means to pay off your new mortgage, as well as any other long-term debts (such as car loans) and other living expenses.
As a result, borrowers are generally required to submit current pay stubs from the past 2-3 months. So, be sure to make copies of all these documents and keep the originals in a safe place.
For those who are self-employed, your lender may also require a little more information to help verify your source of income. Copies of your last two federal income tax returns, as well as profit-and-loss statements, may be requested for review.
2. Tax Returns and W-2's and/or 1099's
To provide further proof of employment and income, make sure to prepare copies of your last W-2 and/or 1099 statements and tax returns. Typically, lenders will ask for two years' worth of information.
Remember, a W-2 form is used by company employees. This form shows a person's income and how much money was taken out for taxes. In contrast, a 1099-MISC is used by independent contractors or the self-employed. This form shows a person's income, but does NOT show how much money was taken out for taxes.
These documents are important because they not only verify your salary but also show trends in your earnings and details about investment gains or losses. Most importantly, this information can affect your total income level and subsequent loan approval amount, as calculated by the lender.
3. Credit Report
Before you are approved for a refinance, lenders will also perform a credit check. While each loan program may have its own minimum credit score requirement, it's always better to be safe than sorry. So, even if you are just considering refinancing, it is never too early to check all three FICO scores to make sure that you're on the right track.
By taking this precautionary step, you have the opportunity to review your credit rating before your lender does. And, you get the chance to take care of any necessary credit repair work. This means getting rid of those extra credit cards you don't really need, paying down your account balances and making sure you pay all your bills on time from this point forward. Remember, the best refinance rates are almost always reserved for the borrowers with the best credit.
To learn more information about how to protect your credit score, check out PennyMac's blog post, Ten Ways to Protect Your Credit Score for Mortgage Application.
4. Statements of Outstanding Debt
Even though your lender will be able to see your existing debts via your credit report, you will still have to provide documentation detailing your current outstanding financial obligations. So, make sure to gather account statements on remaining debts, including your existing mortgage, home equity lines of credit, car loans and student loans. In some circumstances, borrowers may also need to file alimony and child support payments, if applicable.
5. Statement of Assets
Just as when you first purchased your home, your lender will want to verify that you have enough cash in your savings accounts to cover any out-of-pocket closing costs and at least two months' worth of mortgage payments.
Therefore, make sure to prepare copies of statements for your saving accounts, retirement account, stocks, bonds and certificates of deposits. All of these documents will provide proof of any additional assets you own in addition to your regular salary… and may help you score a better refinance deal!
A Quick Review
Refinancing an existing mortgage is very similar to applying for a new home loan. As a result, borrowers have to provide a lot of the same documentation all over again to prove their financial health.
So, spare yourself some frustration. Before you contact your refinance officer, make sure you've begun compiling:
- Pay stubs
- W-2s and tax returns
- Credit reports
- Statements of outstanding debt
- Statements of assets