What documents do I need to refinance my mortgage?
A declined mortgage refinancing application doesn't just deprive you of credit; it can also temporarily hurt your credit score.
Of all the possible reasons for rejection, you don't want an incomplete application to be one of them because it's completely avoidable.
From income statements to credit information and proof of assets, below is a complete list of what documents you'll need for a mortgage refinance so you can get approved with a favorable interest rate.
Why you need so many documents to refinance your mortgage
Before the housing bubble crash in 2008, lenders were offering mortgages with little verification of a borrower’s creditworthiness or ability to repay their debt.
A tsunami of defaults followed, causing an economic crisis. Nearly 8.7 million jobs vanished, consumers cut spending to a level not seen since World War II, and many lost significant retirement savings.
As a result, new regulations were implemented to verify a borrower’s financial health and to prevent economic crises of such magnitude from happening again.
The new rules added a whole new layer of paperwork needed to secure a mortgage or refinance one.
But it's not rocket science. All you have to do is prove to lenders you’re financially responsible, capable of repaying your loan, and therefore a safe long-term investment for them.
7 types of documents you need to refinance a mortgage
Please keep in mind that the required documentation may vary depending on the lender you are working with, the type of refinance you are pursuing, and your financial status.
But more often than not, you will likely be asked to provide the following information:
1. Proof of income
Income documents verify your earnings and demonstrate financial stability. Lenders assess them to ensure you can make loan and debt payments, as well as cover living expenses before approving a home loan.
Documents needed if you earn a salary
Employers typically provide pay stubs and tax forms to their employees, whether salaried or hourly.
These documents provide valuable information about your income, deductions, and taxes for the year. If you don't have them, contact your company's HR department.
- W-2 forms for the last two years
- All 1099 forms for any additional income sources
- Pay stubs covering the last 30-day period
- Bank statements for the previous two months
- Signed personal federal tax statements for the previous two years, or a completed IRS Form 4506-T
- Contact information (names, addresses, and phone numbers) for all employers during the previous two years
- Written justification for employment gaps or employment durations of less than two years
Documents needed if you are self-employed
If you work for yourself, such as a freelancer or independent contractor, you won’t have traditional documents like a W-2 or pay stubs from an employer.
Instead, you will need to provide other forms of documentation to prove your income. Typically, you can get statements from your business bank account and create business statements using bookkeeping software.
Additionally, depending on how you filed your taxes, you may have a PDF copy of your tax return or the ability to download one from your online tax filing software.
A valid mortgage refinancing submission must include the following documents:
- Signed federal tax returns for the last three years, both personal, and potentially for your business
- Your most recent profit and loss statement, either quarterly, or year-to-date
- A complete list of all your business debts
- Bank statements from the last two months for your personal and business accounts
- Fannie Mae's form 2804, if you own rental properties
2. Insurance documents
Insurance information is necessary to protect you and your lender. It ensures your property is adequately covered and provides financial security in case of unexpected events.
Homeowners insurance
Your lender will need a copy of your homeowner's insurance declaration page and may request your insurance agent's contact information for additional details.
They may also want an appraisal to confirm adequate coverage. If your home's value has changed, you will need to work with your insurance provider to update coverage limits.
Title insurance
Your recorded deed with the names of the legal owners and a title insurance document with a legal description of the property are crucial to confirming your property taxes for the lender.
You will need your title insurance ready at closing, along with other required documents. If you cannot locate these documents, reach out to your original lender or title company to see if they have copies.
4. Statements of debt
Lenders usually require a DTI of 43% or less for mortgage refinance eligibility. This means your monthly debt payments, including the new mortgage, should be at most 43% of your gross income.
Statements of debt help lenders assess your ability to repay the refinanced mortgage. It’s difficult to determine your overall financial health without this information.
To demonstrate your financial commitments, you will require the following documents:
- The current statement for the mortgage on the property you want to refinance, as well as for any additional properties you own
- The latest billing statement for any existing home equity loans or lines of credit
- The most recent monthly statement for any accounts included on your credit reports, such as student loans, car loans, personal loans, and credit cards
- Any outstanding debts not listed on your credit reports, such as payday loans
5. Statement of assets
When you initially purchased your home and acquired your present mortgage, your lender likely confirmed you had sufficient funds to cover closing costs (unless you included them in your loan).
Now, if necessary, they will need to ensure you have enough cash to cover these costs again, as well as at least two months’ worth of payments for your new mortgage.
This is where proof of assets is valuable:
- Statements for bank checking and savings accounts
- Retirement account statements
- Brokerage account statements
- Certificates of deposit statements
6. Credit information
Whenever you request a loan, lenders will review your credit report to assess your creditworthiness. Your credit report reflects your financial history and behavior with previous loans.
If there are any negative items on your report, such as late payments, collection accounts, judgments, or bankruptcy discharges, you can send a letter of explanation to your lender.
These documents could include:
- Statements that show your payment history for public utilities, car insurance, phone contracts, cable TV, or any other expenses
- Bankruptcy discharge papers if applicable
7. Additional documents
Your lender or personal financial circumstances may require you to submit additional paperwork. For example, if your bank records display a recent large deposit, you will need to clarify the source of those funds.
If you received funds as a gift from a relative or friend to cover closing costs, you will be asked to provide a written confirmation from them.
Other possible documents that may be requested include:
- A letter explaining any previous credit issues or periods of unemployment
- Proof of child support or alimony payments
- Verification of rental income for properties you own as investments
- A gift letter or any other records confirming the origins of deposits
- Documentation pertaining to a discharged bankruptcy
How to land the best mortgage refinancing terms
Please note that in some cases, these tactics may not work because your refinanced mortgage approval rate depends on other factors besides your income and creditworthiness, such as your home, its location, and current trends in mortgage rates.
Increase your home equity
Home equity is the difference between the current value of your home and the outstanding mortgage balance. As you pay off your mortgage or as the value of your home increases, your home equity increases.
A higher home equity leads to a lower loan-to-value ratio, making it less risky for lenders and resulting in a higher loan amount with lower interest rates.
Compare refinance rates from multiple lenders
A difference of just 0.5% in interest rates can result in significant savings over the life of your loan.
For example, if you are considering a refinancing loan of $200,000 with a 30-year term, a 7% interest rate would result in a total cost of $279,013, while a 7.5% interest rate would bring the total cost up to $288,929.
That equals $9,916 in savings.
But it's not just the interest rate you should pay attention to. Also, consider the annual percentage rate (APR), which includes all annual fees and offers a more accurate understanding of the total cost.
For example, a lender might advertise a lower interest rate of 7%, but with higher fees and closing costs, the APR could end up being higher than that of a competitor with a 7.5% interest rate and lower or no fees.
Buy points to lower the interest rate
Points are prepaid interest that a borrower can pay upfront to reduce the interest rate on their loan. One point typically costs 1% of the loan and can lower the interest rate by 0.25%.
If you have a $200,000 loan and pay one point or $2,000, your interest rate could be reduced by 0.25%. Buying points makes sense if you plan to stay in your home for a long time.
Always consider the upfront cost of buying points and how long it takes to offset them. Consult a financial advisor or lender to weigh the benefits against keeping a higher interest rate.
Maximizing mortgage refinance success
By gathering and organizing all necessary financial records, tax returns, and identification documents, you can ensure a smoother and faster refinance process.
Because so much of a loan application happens online, having digital copies of the necessary documents at the ready will speed things up for you.
Your bank, mortgage, and other loan statements can be downloaded from each bank's website and other documents can be scanned and saved as PDFs for easy electronic submission.
Being organized and ready will make it all go smoothly.
Don't hesitate to contact your lender or financial advisor for guidance and assistance. With adequate preparation and documentation, you can potentially save thousands of dollars on your mortgage.