The “New” Rules of Rapid Refinancing

May 23, 2009

By Brian Short, CMC, CRMS, GMA

Many of us who have “survived” in the mortgage business are very busy these days with folks who desire to refinance their homes.  With rates in the range from low 5% to high 4%  for a 30 year fixed for many borrowers, this is an ideal time to consider refinancing to lock in an historically low long-term interest rate on your house.  Maze

However, the rules have changed for many borrowers.  The days of no documentation, high loan-to-value, cash-out, debt consolidation mortgages have come to an end. 

Does that mean it is impossible to accomplish any of these goals in a relatively painless refinance process – absolutely not!  Just take heed of the new “Rules for Rapid Refinancing”:

1.  Get your documentation organized and copied for your mortgage professional.   Employed workers and self-employed business owners will all need to prove their income and their assets to qualify for a new low interest loan.  I remind my customers that they should keep the following documents for the following length of time – just to be safe.

     a. Pay Stubs – Keep these all year until you receive your W-2 and have completed your tax return for the year.

     b. Bank Statements – Keep these 5 years.  The IRS can audit you for the past 5 years.  It your responsibility to prove your case if you would be audited.

     c. Tax Returns and W-2’s – Keep these until you die.  Let your kids throw these away for you and be amazed at how little (or how much!) you made when they were kids.  You never know when you will be asked to document income, deductions, businesses, rental houses, etc.  File a copy away in a cabinet (and scan a copy to your hard-drive in case you need to e-mail a copy for your kid’s college financial aid application, etc.) each year.

2.  You will not be able to pull cash out of your house for more than 85% of appraised value.  If you owe more than 85% of your current appraised value then you will not be able to get any cash to consolidate debt, pay off other obligations or even make improvements to your house.  Trying to get cash out of your rental house will be nearly impossible unless you owe very little on the rental house.  Getting cash out of Real Estate is not something Fannie Mae and Freddie Mac (or FHA or VA) are too interested in doing in this economy.

Does this mean that you can’t refinance your house?  Absolutely not!  You can still lock in a lower rate, shorter term (go from a 30 yr to a 15 yr), longer term (go from a 15 yr to a 30 yr), switch from an adjustable rate to a fixed rate, or combine your 1st and 2nd mortgages into one mortgage payment with a lower payment or a payment which includes principle reduction.

3.  Use this time to focus on getting out of debt and limiting your purchases of “things” to those items you can pay for with cash.  Running up credit card debt and buying vehicles (cars, boats, motorcycles, RV’s, etc), furniture, appliances or TV’s with credit is generally not the way to get or keep your finances under control. 

4. Pay cash.  Use cash.  Save some cash.  Keep some financial margin in your life buy having some cash in the bank to carry for 3-6 months in case your job, your health, your spouse – fail to meet your expectations.  Having a good payment history on your current obligations will get you in the door if you need or want to refinance your house.

5. Anticipate the future – as much as possible.  One of my Dad’s famous sayings is: “No one will loan money to a poor man!”  Once you lose your job, get sick or hurt or get behind on your payments, you’re stuck.  Especially in this current market – the squeaky clean borrowers are getting good loans.  Don’t wait to lock in on historically low fixed interest rates if you don’t have one and could qualify.  Waiting might put you into one of those categories of people who can’t qualify for one.

Is this a great market for quick and painless refinancing – absolutely!  However, there are some new rules.  Some of you are saying, “these are not NEW rules!”   “These are the rules we all used to live by.”  I agree that these rules may be new to this current generation of borrowers but are really time-tested rules for ensuring financial success – even when much seems to be crashing in on those all around us.  Whether these rules are new or old stand-bys they are in place for now.  Knowing them and playing by them will make you a winner – even in this economy!  Now, let’s play!

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Preparing for Home Ownership: A ‘Do-List’ for a Soon-To-Graduate College Student – Part 2

November 24, 2008

By Brian Short, CMC, CRMS, GMA 

What else can you do to help you prepare for home ownership in the next 12 or 24 months?  Work on these things:

1. Pay your bills on time.  Utilities, cell phone, car insurance, student loans or other debt your are paying off quickly – make you payments on time and in full.  Put them on an auto pay through your bank if you have your paycheck on an auto deposit.  It all goes in and out every month – on time and in full – even if you are out of town, covered up at work or just distracted for some reason.

balance-checkbook2. Keep your check book reconciled and up-to-date.  This may seem unnecessary in the age of “online banking” but even the “best of us” forget to enter a debit card payment once in a while and it comes back to bite us where it hurts.  Overdraft charges of $35-50 each will add up quickly and cause a blemish on your banking history when applying for a new mortgage in the months to come.  Mortgage underwriters like to see very clean banking history and prefer to loan to those who demonstrate the ability to manage their money – no matter how much or how little they make.

3. Save some money for a down-payment and for your closing costs.  Depending on the loan program you desire, you will need to save 3%, 5% or 20% of the sales price of the home you desire to buy.  Any loan for which you qualify for more than 80% of the sales price will require a monthly mortgage insurance premium which will cost you $50-$250 per month depending on the size of the loan in addition to your monthly property taxes and home owners insurance payments. 

FHA loans will let you buy a house with only a 3% down payment but you will have an up-front and monthly mortgage insurance premium figured into this loan.  If you bring a 20% down payment, you will avoid this mortgage insurance premium.  In addition, your closing costs and pre-paids will average about 3% of the sales price with most loan programs.  Therefore, if you desire to buy a $150,000 house in 2 years and you want to use an FHA loan you should need $4,500 for your down payment and about $4,500 for your closing costs or a total of $9,000 to close the sale.  That should give you a good goal to shoot for!

3. Keep your paperwork in order.  You need to keep the following financial records.  If you don’t have filecabinetthem, start keeping them – THIS WEEK!

   a. Pay stubs – Keep in order for 1 year until you successfully file your tax return for that year.

   b. Sales Receipts and Debit Card transaction receipts– Keep in an envelope or file folder for each month for the year until you have filed your tax return for that year.  You may decide to keep them for as long a five years for warranty purposes for items you have purchased.

   c. Bank Statements (Print off hard copies every month) – Keep in file folders in order for 5 years.  The IRS can audit you for any year for the past 5 years. 

   d. W-2’s and Tax Returns– Keep until you die.  (Let your kids or grand kids throw these away.)  Do not throw away you tax returns – always keep a copy of the exact return you filed with the IRS.  I keep an electronic (pdf) copy and a hard copy.

   e. Insurance documents – Keep your most recent copy of your health insurance, auto insurance and renter’s insurance in their own file folder in your file cabinet for easy reference.

 glove-box1  f. Auto service receipts– Keep all of you oil change, tire purchase and auto repair receipts in the glove box of your car along with your insurance card and annual registration if there is room.  It your glove box becomes too full, start a separate file for this information.  You will need this information for warranty purposes and for documenting the service on your car if you ever sell it someone who wants to know how well you have taken care of it. 

These simple habits, developed early in your adult life, will help you be a stellar mortgage applicant and allow you to qualify very soon for the best possible mortgage loan programs available.