If you’re considering refinancing your home, you must provide proof of your income, assets, employment, and liabilities. Just like you did when you bought your home, you must prove you can afford the new loan. So what documents are needed to refinance your home?
Keep reading to learn everything you’ll need to refinance
Before you gather your documents for a refinance, you must determine the type of income you have. Borrowers working for someone and those who are self-employed have different documentation requirements.
W-2 borrowers usually work for someone else on a salary or hourly basis. They report their earnings on a 1040 tax return and have a third party that can verify their income.
If you work for someone, you must provide your paystubs covering the last 30 days (usually 2 paystubs), the last 2 years of W-2s, and 2 bank statements proving regular receipt of your income.
If you own 25% or more of a business, you are considered a self-employed borrower. In some cases, self-employed borrowers receive a combination of income including W-2 reportable income, K1 distributions, and other income types.
Because self-employed income is less consistent and isn’t verifiable by a third party, lenders take a larger risk of lending to you. To ensure you qualify for the loan, they do their due diligence to ensure the income is stable and reliable. This typically means proving a history of receipt for at least the last 2 years.
In addition, lenders require the last two years of your personal and business tax returns. This includes the 1040s and all schedules (all pages). You must also provide a year-to-date profit and loss statement to prove your current year’s income is on the same track too. Your P&L must be on company letterhead and be signed and dated.
Most self-employed borrowers must also provide a statement from a third party that can verify their income, such as a CPA.
Retired or Pension
If you’re retired, you may still be able to get a mortgage, but different documents are needed to refinance. You must be able to prove you have a steady income and that it will (or should) continue for at least the next 3 years.
To prove your retirement or pension income, you must provide your Social Security award letters, pension statements, and current proof of receipt of the income, such as the last two months’ bank statements. You may also need to prove the continuation of the income if there’s any question it won’t continue.
Income documents needed to refinance a mortgage
The table below shows the most common documents needed to refinance a mortgage.
|Self Employed (Ownership of 25% or more of a business)||
|Retired or Pension||
Each loan program has different asset requirements. Some loans require you to have a few months of reserves (full mortgage payments) available. All loans require you to have money for a down payment and the closing costs.
Even if your loan program doesn’t require reserves, you must prove where you’re obtaining the money for the down payment and closing costs.
Below are common asset documents needed to refinance.
You’ll typically need the last two months of bank statements to prove your assets. Lenders look at your recent deposits and withdrawals and may question anything out of the ordinary, such as large deposits or large withdrawals.
Your deposits should coincide with your income. If they don’t, be prepared to provide a paper trail of the deposits to prove they aren’t a loan and/or that the money belongs to you.
IRA Account Portfolio
If you’re using your IRA as your proof of assets, you must provide the most recent monthly statement showing the balance. Lenders may use around 70% of the balance to account for taxes and penalties you may face if you withdraw the funds.
During the application process, the lender will need to pull what is known as a tri-merge credit report. This will show your credit scores and history across all three major credit bureaus (Experian, Equifax, and Transunion).
The contents on the credit report are used to verify all debts and will be calculated in the debt-to-income ratio.
Investment Account Documentation
If your money is in an investment account, you must provide documentation proving the balance and that the money belongs to you. Unlike retirement funds, lenders may use a higher percentage of the balance since there aren’t penalties. Some lenders use 100% of the balance and others use slightly lower percentages to account for balance fluctuation.
When you’re wondering what documents are needed for a refinance, don’t forget to document your employment. This is a big factor in your loan application since lenders must determine if your employment is secure and stable.
To document employment, you must provide lenders with your employer’s name and contact information in addition to your paystubs or proof of your income.
Lenders have one of two ways of verifying your employment:
· Verbal verification of employment – A verbal VOE means the lender calls your employer to verify you work there on the dates you stated. They also ensure you are presently employed.
· Written verification of employment – If the lender needs more information about your employment and/or income, they may send a written Verification of Employment request to get more information about your income and time at the company to ensure you are a good risk.
Proof of Debts and Credit
Along with the above documents needed to refinance, lenders must determine what debts and credit you have outstanding. You’ll disclose this information on your application, but they must have proof with a tri-merge credit report.
When you apply for a mortgage, the lender asks for your permission to pull your credit from all three credit bureaus – Trans Union, Equifax, and Experian. They use this information as a baseline to determine your eligibility for a loan.
Along with the information provided on the credit report, you may need to provide your most recent account statements for any liabilities with a different payment amount than the credit report shows or if you recently paid off any accounts still showing a balance on the credit report.
The information provided in the credit report helps lenders calculate your debt-to-income ratio to ensure you qualify for the loan.
Mortgage Statements and Proof of Insurance
When you refinance, you must prove your housing payment history for the house you’re refinancing as well as any other properties you own.
You must disclose all properties you own and the amount of financing/monthly payments on each.
Valid Government Issued ID and Social Security Card
Along with the financial documents needed to refinance, you must also prove your identity. Lenders require a copy of your driver’s license or other government-issued ID. This proves you are the person on the loan.
Also, to complete your refinance process, you must sign and date the closing documents. To do this, you must provide proof of your identity (a government-issued ID) with your Social Security card to a notary who will witness you signing the documents to ensure that you are the person named on the loan.
How the Mortgage Refinance Process Works
To refinance your loan, you must complete a loan application, just like when you bought your home.
The difference is this time you already own the home and just want a different loan on it. The reason you are refinancing will determine what documents are needed to refinance.
Reasons to Refinance
Homeowners can refinance for many reasons, but here are the most common:
- Rate/term refinance – This refinance pays off your existing mortgage and replaces it with a mortgage for the same amount. You refinance strictly to get a better interest rate or better term, such as refinancing from an ARM to a fixed-rate loan.
- Cash-out refinance – This refinance taps into your home’s equity. You can usually borrow up to 80% of the home’s value. If you paid your mortgage down and/or the home appreciated, you may have room to take cash out for debt repayment, home renovations, or other expenses you need money for.
Once you determine the reason you’re refinancing, the lender will determine which documents are needed to refinance.
Along with your documents, lenders will look at a couple of metrics to determine your ability to repay the loan. Knowing what lenders need can help you best prepare for your loan application.
Factors Lenders Consider to Refinance your Loan
Lenders first look at your credit score. Like we said above, they make sure your credit score meets the loan program’s requirements and that you have a history of paying your bills on time.
Each loan program requires a different credit score, but on average, you should have a 640-credit score or higher for the best chances at approval.
Lenders next look at your debt-to-income ratios to make sure you can afford the loan. A DTI is a comparison of your monthly debts to your gross monthly income (income before taxes).
Which debts are included in your DTI and how lenders determine your income depend on several factors.
Lenders include all debts in your DTI that report on the credit report. Common examples include minimum credit card payments, car loan payments, student loan payments, mortgage payments, and alimony/child support payments. They don’t include expenses such as utilities, insurance, food, or clothing.
How lenders determine your income depends on how you receive it. If you’re self-employed, they may take a 2-year average of your income to account for seasonality or cycles. If you work for someone, they’ll take a 12-month average of your income to determine your gross monthly income.
Typical DTI Limits
Each loan program has different DTI limits, just as they each have different credit score requirements. Here are the most common DTI limits for popular loan programs.
|FHA||31% / 43%
FHA Refer/Eligible Purchase & Refinance
FHA Streamline Credit Qualifying
37% / 47%
· If the client meets residual income requirements or has 3 months reserves:
· FHA Refer/Eligible Purchase & Refinance
· FHA Credit Qualifying Streamline
38% / 45% FHA FICO 580-619 Purchase & Refinance
50% FHA Streamline Non-Credit Qualifying
What is Conditional Approval?
Once you provide lenders with the documents needed to refinance, they’ll process your application and qualifying documentation, providing you with a conditional approval.
The conditional approval means the loan is approved as-is, but before you can close, you must satisfy any conditions they state in the letter.
The most common documents for a refinance to clear up a conditional approval include:
- Updated Paystubs
- Updated homeowners’ insurance declaration page
- Letter of Explanation on any disputed tradeline or accounts
- Other documents that may be required to support income requirements
- Updated bank statements
- Proof mortgage is current
At Choice Home Mortgage we shop the rate for you through our network of wholesale lenders.
Our mortgage professionals and processing staff will review your unique situation to find not only the best rates but structure the loan so that we can get it funded fast. We help streamline the documents needed to refinance by matching you with loans you qualify for with reputable lenders.
To learn more get started now.