Challenges of Refinancing

The pundits are declaring that mortgage rates are likely to begin an upward trend in 2011. There’s no time like the present to refinance – but can you overcome all the obstacles in your way?

Freddie Mac’s Chief Economist, Frank Nothaft, is predicting that 2011 will see mortgage rates remaining generally low, but increases in the 30-year fixed-rate mortgage is likely. Therefore, it seems like there’s still plenty of time to refinance. The trouble is, can you get one?

Credit craziness

The first obstacle you’ll need to overcome is your credit score. In the past, you could have a FICO score in the low 700s and still get a good rate. In today’s overly defensive mortgage lending climate, however, you’ll need a score of at least 740 for a bank to even look your way, and some lenders may require an even higher ranking.

Even if you pay all your bills on time and think you’ve got an ace score, you may be surprised at the reality of your situation. The three credit companies – Experian, Equifax, and TransUnion – use different methodologies to calculate your score. Sometimes, there are vast differences in what each company reports. Get a copy of your credit report from each of them to make sure that there are no errors. Just one mistake on one report could cause you trouble when you attempt to refinance.

Paperwork potpourri

When you apply to refinance your loan, you may be asked for every piece of paperwork under the sun. Remember that blank page on the back of your bank statements that you always throw away? If you don’t provide it with your application, your refinance may be delayed. Mortgage lenders will also want to see every page on every tax return that you’ve filed for the past two to three years, as well as proof of employment. If you don’t scan these documents properly, they’ll send them back to you.

Home values

Another challenge will be the value of your home. You may think it’s worth a certain amount, but you haven’t taken into account the devastating affect of the current mortgage crisis. Sure, your neighbor with an equivalent home sold it well below what you think yours is worth. But an appraiser may think otherwise, because his estimated value will be based on what similar homes – including your neighbor’s – sold for in your area.

In order to get a jump on whether or not your home will appraise where you need it to, contact a local realtor and ask what similar houses to yours have been selling for in your vicinity. Some may charge a small fee to run those “comps,” but it will save you lots of time and money in advance if you know you won’t qualify for the amount you need.

Refinance rates are still at historic lows. With a little savvy and a lot of patience, you should be able to take advantage of them, and overcome all the challenges sent your way.