How to Refinance to a Conventional Loan

What to know about mortgage refinancing and Conventional loans 

Refinancing to a Conventional loan can improve your mortgage terms, reduce monthly payments, or secure lower interest rates. When deciding if refinancing is right for you, make sure to consider what home prices and mortgage rates may do in the future. You should also evaluate all costs and benefits, as refinancing into a new loan will carry some closing costs that will need to be paid, either up front or rolled into the loan.

How exactly you refinance your mortgage will depend on which loan type you are refinancing from, as well as your financial profile. Some general steps when you refinance to a Conventional loan are:

Assess Your Current Mortgage

Review your current loan documents to understand your current loan terms. You will want to especially pay attention to how much you still owe on your loan, your current interest rate, and any prepayment penalties. This will help you determine if refinancing is financially beneficial.

Check Your Credit Score

Your credit score is crucial for qualifying for a Conventional loan. Lenders typically require a minimum score of 620*, but a higher score can secure better terms. If your score is low, work on improving it by paying down your current debt and making timely payments.

Determine Your Home’s Value

Get an accurate assessment of your home’s value to calculate your loan-to-value (LTV) ratio. For a Conventional loan, the LTV should be 80% or less to avoid private mortgage insurance (PMI). Use a professional appraisal or research online tools for an estimate.

Gather Required Documentation

Find out and prepare the necessary documents for refinancing. These can include:

• Income Verification: Pay stubs, W-2 forms, and tax returns.
• Employment Verification: A letter from your employer or recent pay stub.
• Asset Documentation: Bank statements and investment accounts.
• Current Mortgage Information: Loan statements and prepayment penalty details.
• Property Information: Recent appraisal or comparative market analysis (CMA).

Submit Your Application

Submit your refinance application to your lender. The lender will review your financial information, credit score, and property value to determine your eligibility.

Underwriting Process

Underwriting is the process that your lender goes through to verify your personal and financial details before deciding to give you a loan.

The lender will verify your income, employment, and credit history. They will also review the appraisal to ensure the property’s value supports the loan amount. This process can take several weeks, so be responsive to any requests for additional information.

Closing on the Loan

If approved, you will sign the final loan documents and pay any closing costs, which may include appraisal fees, title insurance, and attorney fees. Review all documents carefully before signing.

Post-Closing Considerations

After closing, start making payments on your new Conventional loan. Make timely payments to maintain a good credit history. If you had PMI on your previous loan, check if you can cancel it, as you may now have 20% equity in your home.

Additional Tips

• Consider a Rate-and-Term Refinance: This allows you to change the interest rate or loan term without increasing your loan balance.
• Evaluate Closing Costs: Compare the savings from a lower interest rate with the closing costs to ensure the refinance is beneficial.
• Consult a Financial Advisor: If you have any questions or are unsure about the right path for you, consult a financial advisor or mortgage professional for guidance.

By following these steps, you can successfully refinance to a Conventional loan and potentially save money on your mortgage.