How to Prepare for a Refinance Loan

Buying a new home with an FHA mortgage means preparing your credit and loan repayment history--know your FICO scores and make sure you are working on a solid 12 months of on-time payments for all your bills before applying for the loan. But did you know that applying for any credit-check-required refinance loan will generally require the same type of preparation? 

Some financial advisors recommend treating a cash out refi loan the same as a new purchase loan in the prep stages. There are some things you should know about preparing for the loan. When you understand more about how the FHA refinance loan process works you can save yourself time, money, and make yourself a much better credit risk.

Applying For New Credit Before A Loan App? Not So Fast

Opening up new lines of credit in the year leading up to your refinance loan application can hurt your chances at loan approval. Chances are good that your lender will not only consider the current amount you owe on your credit cards, but also the potential amount you could owe on your maximum credit amount. Stay clear of new auto loans, new credit cards, or other lines of credit 12 months before you apply to refinance a mortgage. This will greatly improve your chances at loan approval.

Slash Your Existing Debt

The borrower’s debt-to-income ratio is one of the most important calculations your lender will make when reviewing a credit-check-required FHA loan application. Slash the amount of your overall debt and remember that your loan officer won’t just calculate the amount of your current debt versus your current income; the debt to income ratio will also be run including the amount of the proposed mortgage payment, too.

Save Your Money And Make A Budget

Buying a home is an expensive process, but refinance loans also come with their own fees and expenses. You may have to pay for a brand new appraisal, possible compliance inspections, and any discount points you wish to use.

Plan Ahead

As previously mentioned, it’s best if you take at least 12 months to prepare for a cash out home loan refinance application. If you don’t give yourself at least one year to save, check credit reports, and reduce your debt, chances are good that you won’t be fully prepared for the scrutiny your lender will give your FICO scores, loan repayment history, and debt-to-income ratio.

 

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