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Get Pre-Approved for Your Refinancing
It is important to seek lender pre-approval at the beginning of the refinance process to ensure that you qualify for the refinancing. Getting pre-approved can help you determine if refinancing your existing mortgage is possible so that you can avoid wasting time and money on up-front transaction costs that may be non-refundable. The pre-approval process for a refinancing focuses on standard borrower qualification requirements as well as how much equity you have in your property. Lenders evaluate both factors to determine your ability to qualify for the refinancing and what size loan you can afford.
There are several advantages to getting pre-approved for a refinance, including the following:
- Close your refinance faster
- Identify and resolve issues with your loan application
- Greater certainty that your refinance closes
- Free for borrowers
- No obligation to work with lender if you find better mortgage terms
The pre-approval process focuses on borrower mortgage qualification, what size mortgage the borrower can afford and the borrower's ability to make the monthly mortgage payment and pay back the mortgage. Getting pre-approved typically requires a borrower to provide certain personal and financial information to a lender. Lenders typically require that borrowers submit pay stubs, bank statements and other personal financial documents to verify your income and assets. The lender will also review your credit score. Your personal employment or financial situation may have changed since you obtained your original mortgage which could impact your ability to refinance your loan. Although somewhat unusual, some lenders may require that borrowers submit a full loan application to get pre-approved.
The pre-approval process for a refinancing also focuses the loan-to-value (LTV) ratio. LTV ratio represents the amount of your mortgage divided by the value of the property that you are refinancing. For example, if you want to refinance a $400,000 mortgage on a property valued at $500,000, the loan-to-value ratio is 80% ($400,000 mortgage ÷ $500,000 property value = 80%). Lenders use the LTV ratio to determine how much equity you have in your property. Property equity is the value of your property less any mortgages or loans against the property. So using the same example above, a property valued at $500,000 with a $400,000 mortgage has $100,000 in property equity ($500,000 property value - $400,000 mortgage = $100,000 property equity). Lenders want to determine that you have sufficient equity in your property to support the new loan amount.
Be sure to understand your estimated property value and how much equity you have before contacting lenders about refinancing your mortgage
It is important to understand if the value of your property has changed since you obtained your existing mortgage as this will impact the LTV ratio and property equity as well as your ability to qualify for the refinancing. You can check out real estate web sites like Realtor, Trulia and Zillow to get an initial estimate of your property's value. Lenders may also have resources they can use to provide an initial estimate of the value of your property. This will help determine if your LTV ratio meets the lender's guidelines and if you have enough equity in your property to refinance your mortgage. Lenders will typically offer their best interest rates on mortgages with an LTV of 80% or less. If the value of your property has declined, your LTV ratio may increase (and potentially exceed 80%) depending on the loan amount you are seeking, which can make refinancing challenging.
Use our get pre-approved feature to get approved and compare refinance terms from multiple lenders. The form is personalized, no obligation and does not affect your credit.
Mortgage pre-approval is typically subject to the borrower finalizing his or her mortgage application as well as lender review of the property appraisal, title report or abstract and other documentation required to close your mortgage. Additionally, your mortgage pre-approval may also be based on a specifc interest rate or mortgage program so if interest rates increase or you select a different mortgage program, it may affect your ability to receive final approval for the pre-approved mortgage amount.
It is important to highlight that getting pre-approved for your refinancing is different than getting pre-qualified. Pre-qualification is a preliminary assessment of what size mortgage you qualify for and typically does not require borrowers to submit documents to verify their income and assets. Additionally, lenders typically do not thoroughly review your credit profile to pre-qualify you. You may be pre-qualified for a certain mortgage amount but if you do not have sufficient equity in your property (because the property value is too low) or you cannot verify your income or you have a low credit score, you will not be approved when you eventually apply for your refinancing.
Because the pre-approval process requires you to provide more information than getting pre-qualified, being pre-approved is much more valuable to the borrower. When you initially contact lenders about refinancing your mortgage, make sure that you get pre-approved as opposed to pre-qualified.
Just because you are pre-approved by a lender or submit a mortgage application to a lender does not obligate you to work with that lender to finalize your refinance. Even if you have been pre-approved by a lender, we always recommend that you compare proposals from multiple lenders to find the best loan terms. You may find a lender that offers a lower mortgage rate or closing costs. Because you are not required to work with the lender that pre-approved you, you are able to maintain your flexibility while limiting your downside risk.
Even if you are pre-approved we always recommend that you shop lenders to find the best refinance terms. Contact multiple lenders in the table below to compare refinance proposals. Shopping lenders is the best way to find the mortgage that is right for you.
Sources
“Get a prequalification or preapproval letter.” CFPB. Consumer Financial Protection Bureau, 2017. Web.
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