Refinancing is hugely popular in what we hope are the waning months of the coronavirus pandemic. People everywhere are interested in taking advantage of record-low interest rates and also perhaps shortening their loan term or cashing out some of their equity.
Jumping on the refi train requires documentation. With an average processing time of 59 days, up from 45 days the same time last year,¹ you don't want to cause a delay by not having all your papers lined up.
The wait time for refinancing increased due in part to high demand. "Refinance activity increased last week in response to mortgage rates for 30-year, 15-year, and FHA loans hitting their lowest levels in MBA's survey," said Joel Kan of the Mortgage Bankers Association (MBA) recently. "The ongoing refinance wave has continued through the fall, with activity last week up 89% from a year ago."Get Free Quotes
Refinancing made up a larger share of all mortgage activity in the same period. Almost three-quarters of all mortgage applications (72%) were refinances. The same survey by the MBA also found that interest rates for homebuying and refinancing had both dropped to their lowest point in the history of the survey.
What does typical refinance documentation look like, and where can you go to get copies of things you don't have? That is the topic of this article, our third refinance checklist. The first list helped you focus your refi goals so you could reach them sooner, and the second list showed you various ways to determine whether a refi made financial sense given your particulars. Now let's talk documentation.
Documents Required for Refinancing
Basically you can expect to need the following documents.
- Tax returns, W-2s, 1099s
- Credit reports
- Statements of debts
- Statements of assets
Most people don't have all these at their fingertips. The good news is that if your loan is backed by the government—by the VA, FHA, or USDA—you most likely qualify for streamline refinancing. Some documentation requirements are waived to speed up the process and make it easier.
Everyone else, though, must provide all the standard documents. Here is a rundown of what they are and where to get them.
You must verify your income to the lender by supplying paystubs for the past 2-3 months. If your employer provided pay statements on paper, make photocopies or snap some pictures with your phone. If your payroll department is paperless, log in to your account and print out the most recent paystubs.
The self-employed can verify income with the last two federal tax returns. Some lenders might also ask to see a profit-and-loss statement.
Tax Returns, W-2s, 1099s
Lenders typically ask for two years' worth of tax returns, W-2s, and/or 1099s. The good news is that if you kept all your tax return documentation together, it's all in one place. Your folder for the 2019 tax return, for instance, would contain copies of every W-2 and/or 1099 that supported it, along with of course the tax form itself.
The W-2s show a lender a person's wages from a company, while a 1099-Misc shows a self-employed person's income. The reason you provide two years of these documents is so that the lender can discern any trends in your income, such as whether it's seasonal or pretty regular.
If you've misplaced your tax folders or they got damaged, but you used the services of a tax preparer, he or she should have a copy of everything.
It should come as no surprise that lenders will check your credit. Different loan programs have different credit score requirements, but don't wait to be surprised and denied. Check your own scores at all three credit bureaus before applying for a refinance, especially your score at Equifax. Use the only government-backed website for actually free reports, AnnualCreditReport.com.
Credit scores directly affect refi interest rates. A difference of just 100 points could cost you—or save you—thousands of dollars. According to the people behind the credit scoring system, MyFICO.com, you can improve your score these ways:
- Make payments on time.
- Keep credit card balances low.
- Get rid of cards you don't really need.
- Open new credit accounts only when you must.
"What about that free credit score boost I keep seeing ads about?"
Experian has been promoting its Boost service a lot. As we explored in a previous article, Boost works by adding a person's streaming subscriptions and telecom/internet services to his or her overall credit score and is especially useful for young people who don't have many other accounts to base a score upon. But will Boost help you with a refi? No, it won't. While the service lifts your score at Experian, which in turn rolls into your FICO Score 8, mortgage lenders care more about your FICO Score 5, which is best reflected in your score at Equifax.
Statements of Outstanding Debt
Think of these as supporting documents for your credit report. The lender can see all your debts on the report, but it also wants to see the account statement for each one. Start with the most obvious, the account statement for your current mortgage. Then gather statements for any home equity lines of credit, auto loans, student loans, and any other financial obligation for which you get regular statements.
Tip: Scan documents with your phone.
Don't have a photocopier or scanner nearby? Don't worry. Just snap a picture of a document with Microsoft Lens (free) and watch as the doc is magically cropped, color-corrected, straightened, and flattened, just like you scanned it. The same functionality has been copied into some smartphone's native camera apps too. Lens is available for Android and iPhone phones.
Statements of Assets
Refinance lenders want to be assured that borrowers are standing on a solid financial foundation. In this way they are no different from banks that lend to homebuyers. In addition to the income proof you provided via your paystubs, lenders want to see statements for savings accounts, retirement accounts, stocks and bonds, certificates of deposit, and so on.
If you think of the statements of debt as the "negative column," then here's your chance to shine in the "positive column," by proving your assets. What lenders want to see, basically, is that you have enough cash in your savings accounts to pay two months' worth of mortgage payments plus the closing costs of a refinance.
Some homeowners gather their statements of assets in preparation for a refi only to realize they aren't quite ready yet. But now, with their debt list and asset list in clear view, they can map a way forward and secure a good refinance loan at a later time.
A refi requires a lot of paperwork, usually not as much as a home purchase but still a lot. Now you know what this paperwork consists of. This article concludes our series of three mortgage refinance checklists. We hope that we helped you identify your goals and focus your efforts on reaching them (#1), that you learned which variables determine whether a refi makes financial sense (#2), and that you now know the documents you need to gather (#3).Get Free Quotes