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.
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!