A Refinance Checklist

If you're applying for a mortgage loan, you can be certain that the documentation floodgates are about to open. To substantiate that you have enough cash flow and solid income to pay your mortgage, lenders require proof from borrowers in the form of financial documents. The most commonly requested are:

• Pay stubs, including ones from the last two months.
• Two years of W-2 forms.
• Two years of income tax returns.
• Declarations pages from your homeowners insurance.
• Title report, abstract, and survey.
• A breakdown of your assets.

Lenders may require more documents, depending on your situation. If you're divorced, they'll want to see a divorce decree. If you're self-employed, they'll want a year-to-date profit-and-loss statement and current balance. The list can vary, but expect to produce anything pertaining to your financial situation.

Refinancing and protection

Why do lenders require so much documentation? There are two primary reasons:

1. To protect themselves. Unfortunately, borrowers have been known to falsify tax returns, or lie to lenders. This can result in a financial hit to lenders in the event that a borrower can't meet his mortgage payments. The lender uses this paperwork as a gauge to determine your ability to make that mortgage payment on a monthly basis. Are you a good risk or a bad risk?
2. To protect you. Documentation can serve as a method to evaluate whether the borrower has stretched himself too thin. By denying a cash-strapped individual a mortgage, the lender not only prevents a loan default and possible bankruptcy, it may also be keeping a borrower out of jail. That's right-a lender can request a tax return directly from the IRS. If it finds you've falsified your documents, it's considered perjury, and that could heap legal troubles on top of financial ones.

The "no document refinancing" alternative

If all this documentation is too much of a headache, there are No-Doc loans available which require no documentation. A No-Doc loan makes you a greater risk, however, and a lender will charge you a higher interest rate.

If you go with a conventional loan, prepare yourself for the inevitable document requests. Make sure that all your financial documents are in order; the ones listed here are a good start. You can always call a lender well in advance of applying to get a sense of what it needs. With a little organization, you not only make the document process easier, you may even improve your chances of getting that loan.