To successfully refinance a mortgage loan into one with lower interest rates, you'll first have to prove to lenders that you have the financial ability to make your new mortgage payments. You'll have to do this even if your new mortgage payments, with their lower interest rates, are less than your current ones. That's because lenders don't know if your gross monthly income has fallen since you last qualified for a mortgage loan. To help prove your monthly income, you'll have to submit copies of your income tax returns.
Mortgage lenders will take a close look at your financial health before approving you for a mortgage loan. This happens during a process called underwriting. After you apply for your refinance, an underwriter with your mortgage company will compare your gross monthly income -- your income before taxes are taken out -- with your total monthly debts to determine if you can afford your new mortgage payments.
You'll submit copies of several important financial documents to help lenders verify your gross monthly income, including your income tax returns. Lenders vary, but most require you to send copies of your last two to three years of tax returns. That's because lenders want to verify that your income has remained steady during the previous several years. Homeowners with a steady income pose less of a threat to default on their new mortgage loans than do those whose yearly incomes take wild swings.
Your lender will require that you also send copies of other important financial documents. This can include your last two savings and checking account monthly statements, your last two paycheck stubs, your most recent credit card statements and any documents that show recurring income or debt. Your lender will use these documents, along with your tax returns, to determine your financial strength and reliability.
Armed with your financial information, your lender will calculate your debt-to-income ratios, an important factor that determines whether an underwriter will recommend approval of your refinance request. In general, lenders want your housing payment -- including principal, taxes and interest -- to equal no more than 28 percent of your gross monthly income. They want your total monthly debt obligations -- a figure that can include everything from your student-loan and auto-loan payments to your new estimated mortgage payment and your minimum credit card payments -- to equal no more than 36 percent of your gross monthly income. If your debt-to-income ratios are too high, you'll struggle to qualify for a refinance.
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