Dos and Don’ts When Refinancing Your Home

The idea of a mortgage refinance is rather uncomplicated at first glance; however, there are a multitude of things homeowners ought to avoid when they want to do a rate & term refinance or cashout refinance successfully with as few hiccups as possible. Below we have compiled the most obvious and helpful things to avoid while going through your refinance.

Do not change jobs. One of the qualifying factors for your refinance is income. It is vital that you maintain employment with NO gaps in employment while preparing for a refinance, or while your refinance is underway. If you are doing a rate & term refinance uninterrupted employment is a primary factor so that the bank can underwrite you full well knowing your ability to pay based on current employment. If you are doing a cashout refinance it is important to have uninterrupted employment and enough income to qualify for the increased loan amount being applied for.

Do not finance big ticket items like furniture, appliances, or new car. We know it can be quite tempting to get those shiny new things, and they are fun to have; however, doing so during the refinance process could stop you in your track when doing a rate & term refinance or cashout refinance. New credit items that carry balances in the thousands of dollars also come with new monthly payments that postponed for a short period of time until your refinance is completed. We want you to have that new entertainment set up to invite your friends over, we want you to have that new ride parked in the garage…but after your refinance is wrapped up so those cool things don’t threaten the financial objective you are working towards by refinancing in the first place.

Do not use credit cards in excess of normal use. Spending on your credit cards increases your balance owed and your minimum monthly payment. When you are applying to refinance your home you want to put yourself in the best position possible by minimizing both your balance and your monthly payment amounts. Additionally, using your credit card more than usual can give the impression that you are relying on that available credit to make ends meet, which could work against you in the initial underwriting process.

Do not spend money earmarked for “reserves”. Whether it is money in your checking or savings account, reserves that are verified on your bank statements are considered in your overall loan approval. Therefore, when it’s time to fund your loan it is necessary that your balances for all bank accounts included are the same or greater than when your loan application was submitted. While there can exceptions to this, the general rule of thumb is to avoid decreasing balances in the time frame from when your refinance starts to when it concludes. The action step here is to maintain your balances at, or above, your most recent bank statements final balance.

Do not withhold liabilities from the application process (child support, separation maintenance, alimony). These monthly obligations are typically required of you to make especially when court ordered, documented, and recorded. Leaving these out of your initial loan application on accident, or on purpose, will directly negatively impact your ability to qualify for a refinance. These weight of these monthly expenses can easily be lessened by doing a rate & term refinance or cashout refinance, as more cash in hand monthly can support these types of obligations. So, if you are currently paying any of these items listed or any obligation along the same lines as these examples, please communicate that to your loan officer so it will be considered in your refinance application.

Do not make large deposits without first checking with your loan officer. Large deposits to your bank accounts during a refinance can raise a red flag with an underwriter. This is especially noticeable if the large deposit is infrequent, random, and un-paper trailed. Whether it is a gift, a bonus from work, or a windfall financial event, you will need to source the destination where the money came from, document the transfer of the funds, and verify the funds have cleared your account once received. Further, it is likely that an underwriter will ask for a letter of explanation to detail the transaction and why it occurred. To give yourself the best shot as closing your rate & term refinance or cashout refinance, hold off on those large deposits until after your loan is funded and closed.

Do not change banks before or during your refinance. Changing banks can seem harmless on the surface but can break the chain of transactional reporting that underwriters and banks rely on to see direct deposits, payroll, and match up monthly debt obligations with transaction history. The refinance process needs as few disruptions as possible leading up to and through the loan application, underwriting, and funding stages. If you must change banks, do your best to coordinate that change after the rate & term refinance or cashout refinance if completed.

Do not co-sign any loan for anyone. It is often out of generosity that we consider co-signing a loan for someone other than a spouse. It can come with some consequences such as your credit being affected if the primary borrower makes late payments or defaults on the debt obligation all together. Keep in mind that their credit items you co-sign for also shows up on your credit. So, when you are doing a rate & term refinance or cashout refinance, any and all items you have co-signed for become part of the underwriting decision. There are circumstances where proper documentation of on time payments by the primary borrower can be considered so that these monthly debt payments are removed from your refinance process; however, these circumstances heavily rely on proper documentation of all payments for the previous 12 months, or longer, depending on what type of debt it is. Consider your personal refinance situation over and above extending help to someone else in a co-signer capacity.

We know there are still other factors that may come under consideration when you choose to refinance your home. It is an important decision after all. We want to see homeowners get the most out of their homeownership by being properly prepared and educated to seamlessly get through a rate & term refinance or cashout refinance.

If you would like to speak with our team about your home loan questions, please complete the form below. You can also start your loan application online by APPLYING NOW.

Rates & Fees Disclosure:
^‡ The payment on a $300,000 30-year fixed-rate VA loan at 3.000% with a 80% loan-to-value ratio is $1,292.01 with 0 (zero) origination points due at closing. The annual percentage rate (APR) is 3.235%. Payment does not include tax and insurance premium impounds. The actual payment amount will be greater. By refinancing your existing loan, the total finance charges may be higher over the life of the loan. Some state and county maximum loan amount restrictions may apply. Appraisal fee of $600, Processing Fee of $895, Underwriting Fee of $795 included in APR calculations with borrower paying 0 (zero) loan origination points.

^‡ Based on Mortgage Heroes internal data.