Your Guide to Credit and Personal Finance

Documents are new reality for borrowers
By Marcie Geffner, LendingTree.com

If you recently applied for a new home loan, you might be surprised at the large number of documents your lender will expect you to hand over before your loan is approved.

In 2005, 2006 and 2007, many mortgages required only limited documentation. But today, lenders have begun to reinstate traditional “full doc” requirements. The fact is that lenders have become pickier in recent months about who can qualify for a loan, and more documentation is part of that trend. Even if you submitted very few documents when you obtained your current mortgage, you’ll likely be asked for a stack of documents if you want to refinance now.

Why is documentation necessary?
Documentation isn’t just paperwork. Lenders actually use your documents to verify the information on your loan application and make an assessment of your financial situation.

Some of the documents you’ll be asked for include W-2 forms and paycheck stubs. These show that you earn enough income to make the payments on your new mortgage. If you’re self-employed, you might be asked for financial statements to support your earnings or net worth. You may also be asked to produce bank account statements to demonstrate that you have enough cash for your down payment, if you’re buying a home, and closing costs. Be sure to keep copies of all of your documents for your own records.

Lenders also rely on documentation to spot possible cases of loan fraud. That’s another reason why your lender may become suspicious and set aside your file if you refuse to provide the required documents.

Some borrowers think the loan process is annoying or intrusive. But documentation serves a reasonable purpose and typically can’t be avoided unless you’re willing to accept a much higher interest rate. The payback for your cooperation should be a speedier and more definitive thumbs up or thumbs down on your new loan.

4 steps to evaluating your current loan
Thinking of refinancing? Here’s how to evaluate your loan before you make a move.

The prospect of a lower interest rate may have you thinking about refinancing. Or you may be looking to refinance to replace an adjustable-rate mortgage. Whatever your reason, refinancing your loan has the potential to save you money. But how do you know whether you can really save by refinancing your current loan, and whether the savings are worth the cost?

Here’s a step-by-step guide to evaluating your current loan:

Step 1: Pull out your loan documents and look at the terms.
What interest rate are you paying? Is the rate fixed or adjustable? If you have an ARM, when is your rate due to reset? To figure out how much your rate (and monthly payments) could increase, look for your loan’s index and margin as noted on your loan documents. Read more about how ARM interest rates are calculated in our article ARM indexes. And finally, is there a prepayment penalty that could cost you big money if you refinance?

Step 2: Compare your loan’s interest rate with current interest rates.
If you took out a fixed-rate mortgage several years ago and interest rates have since dropped, refinancing may lower your payments considerably. A $150,000 mortgage with a 30-year term and a rate of 8 percent, for example, carries a monthly payment of $1,100. The same mortgage at 6 percent will have a payment of less than $900 a month. Remember, the interest rate you qualify for is based on several factors, including your credit score and your loan-to-value ratio. So don’t automatically assume that you’ll qualify for the lowest rate out there.

Step 3: Think about how long you expect to stay in your home.
Before you make a move to refinance, it’s a good idea to think realistically about your long-term plans. If you expect to move in a year or two, you may not realize the savings you could potentially get from refinancing. In general, the longer you plan to stay in your home, the more sense it may make to refinance.

Step 4: Figure out your break-even point on the refinance.
If your closing costs will be $3,500 and you’ll save $100 a month on payments, it will take you almost three years to recoup those costs. If you plan to move in a year or two, refinancing may cost you more than it saves you. If you plan to stay longer, though, the savings through lower monthly payments can really add up. For more information on calculating your break-even point read the article When does mortgage refinancing pay  or use the LendingTree.com Mortgage Refinancing calculator.

Other factors can come into play when you evaluate your current loan and compare it with refinancing options. For example, you can save on interest over the life of the loan by refinancing into a 15-year fixed loan rather than a 30-year loan. Your monthly payments will be higher than on a 30-year term, but you’ll pay less interest over all by choosing a shorter term.

You can easily evaluate your current loan and compare it with possible refinancing options using the no-obligation LendingTree Mortgage Checkup.

Documents are new reality for home-loan borrowers
By Marcie Geffner, LendingTree.com

If you recently applied for a new home loan, you might be surprised at the large number of documents your lender will expect you to hand over before your loan is approved.

In 2005, 2006 and 2007, many mortgages required only limited documentation. But today, lenders have begun to reinstate traditional “full doc” requirements. The fact is that lenders have become pickier in recent months about who can qualify for a loan, and more documentation is part of that trend. Even if you submitted very few documents when you obtained your current mortgage, you’ll likely be asked for a stack of documents if you want to refinance now.

Why is documentation necessary?
Documentation isn’t just paperwork. Lenders actually use your documents to verify the information on your loan application and make an assessment of your financial situation.

Some of the documents you’ll be asked for include W-2 forms and paycheck stubs. These show that you earn enough income to make the payments on your new mortgage. If you’re self-employed, you might be asked for financial statements to support your earnings or net worth. You may also be asked to produce bank account statements to demonstrate that you have enough cash for your down payment, if you’re buying a home, and closing costs. Be sure to keep copies of all of your documents for your own records.

Lenders also rely on documentation to spot possible cases of loan fraud. That’s another reason why your lender may become suspicious and set aside your file if you refuse to provide the required documents.

Some borrowers think the loan process is annoying or intrusive. But documentation serves a reasonable purpose and typically can’t be avoided unless you’re willing to accept a much higher interest rate. The payback for your cooperation should be a speedier and more definitive thumbs up or thumbs down on your new loan.