Borrowers are motivated to refinance their mortgages when interest rates drop. But lower rates aren’t the only driving factor. Sometimes property owners want to reduce their mortgage payments or shorten the length of their loans. Perhaps a homeowner wants to cash out some equity or needs to take someone else off the loan and deed.
Whatever’s prompting your borrower to refinance may not matter as much as the time it can take. A smooth, quick process is something applicants want because interest rates can change on a dime. Yet, the process can drag on because lenders are backed up with loan applications or other delays. Typical reasons include incomplete paperwork, appraisal problems, and income or credit report changes. Here are four ways to help borrowers speed up the process.
1. Verify Income at the Beginning
Anyone who’s gone through a pre-approval knows they can tell a loan officer an estimated income amount. The loan officer uses that number to calculate whether it appears that a potential borrower qualifies for an estimated range. Say someone wants to apply for a $250,000 mortgage, makes $100,000 a year, and has an acceptable debt-to-income ratio. Based on this information, the lender may pre-approve the borrower for the loan.
However, when that borrower formally applies for the mortgage, they’ll have to provide proof of their earnings, savings, and debts. A lender won’t take a chance on the details the person gave for the pre-approval. They’ll verify income, investments and savings, credit reports, and outstanding obligations like car loans and credit card balances. Even if a borrower is pre-approved, a lender can still deny an application if the details don’t add up.
Borrowers who submit all the necessary income verification paperwork from the start can get a leg up. This documentation includes recent paystubs, W-2s, and income tax returns. Self-employed applicants may need to provide additional documents, such as 1099s or deposit statements. A refinance is a new mortgage to replace the existing one, so homeowners must go through this process again. This applies even if a borrower chooses the same lender to refinance.
2. Contact Homeowners’ Associations for Required Paperwork
You might not think a homeowners’ association or HOA would have anything to do with a refinance. However, think again. An HOA may oversee hazard insurance policies on properties like townhomes and condos. Both attached dwellings and single-family homes that are part of an HOA also receive assessments.
Homeowners lovingly know these assessments as their monthly or quarterly dues. But HOAs can also bill larger amounts for one-time repairs to common areas or shared expenses, such as roof replacements. During a refinance, underwriting must verify any recurring and one-time HOA assessments. These numbers factor into a lender’s decision because they’re home-related expenses.
In other words, a $200 monthly HOA fee might make a $1,400 mortgage payment unaffordable for a borrower. For a refinance, borrowers usually need to submit copies of an HOA’s assessment or billing statements. If an HOA oversees a hazard insurance policy, homeowners may also want to verify any certificates of insurance are updated. The lender’s information will need to be on the certificate, similar to an individual homeowners’ policy.
3. Remind Borrowers Not to Change Jobs
Sometimes sudden surges in refinance applications can cause delays. A sudden decline in interest rates may increase demand for refinanced mortgages. For instance, a modest rate drop for 30-year fixed mortgages in late 2021 increased refinance demand by 9%. More refinances can bog down lenders’ underwriting departments and slow down a borrower’s process.
However, so will changing jobs, taking out new loans, or selling off significant assets. Say a borrower applies for a refinance and submits paperwork to verify their income from a 9-to-5 job. Yet, weeks later, they quit that job to open a business. A lender can no longer rely on the W-2s and paystubs the applicant previously submitted. This borrower will have to reverify their income through other means, delaying the approval.
To prevent this, it’s best if homeowners don’t change jobs or make any major financial moves. While your borrower’s application is in underwriting, remind them that even paying off large debts can cause delays. The same goes for selling investments and assets, such as a second home or stock options. A lender will have to recalculate and reverify debt-to-income ratios. The more everything stays the same, the better.
4. Schedule a Prompt Appraisal
Like an original mortgage, refinance lenders will want to get a property appraisal. Underwriters won’t approve a loan amount that exceeds the home’s market value. Scheduling a prompt appraisal and cooperating with an appraiser’s requests are ways to speed up a refinance.
If your borrower is going through the same lender to refinance, underwriters may make an exception. The home might be exempt from an appraisal because the lender already has a recent one on file. While appraisal exemptions are rare, it’s worth checking into because skipping this step can make a refinance faster.
But assuming that a lender needs an appraisal to approve the loan, borrowers could schedule one ahead of time. Some banks might accept an appraisal from any certified home appraiser. Others may work with specific appraisal companies or appraisers in the home’s general area. If that’s the case, the lender will schedule the appraisal, and the appraiser will contact the homeowner. Borrowers who promptly respond to the appraiser’s requests will help move the process along.
A Smooth and Speedy Refinance
Refinancing a home is similar to taking out a new or original mortgage. In fact, the process is nearly identical. Borrowers must verify their income and expenses, submit insurance and HOA paperwork, and get an appraisal. Nonetheless, a smooth and speedy refinance is possible when a borrower stays on top of paperwork and lender requests.
