Refinance Your Subprime Mortgage in Six Easy Steps

“I’m in an adjustable rate subprime mortgage and I need to know my options to get out of this before my payment jumps.”

Over the past month I have received quite a few inquiries with the exact scenario described above. I have prepared a checklist of six things you need to do so you can make a smooth transition from an adjustable subprime mortgage to a conventional one. This is not a quick fix, I suggest you allow six months to get all this in order. As I explain you’ll see why.

Step 1: Timing is Everything – First of if you are in an adjustable rate mortgage you need to know exactly how much you will owe and when the interest rate will adjust. You also need to find out if there is a pre-payment penalty with the loan and when this will expire. You can call your loan servicer to find this information or look in your closing package.

I would also suggest calculating the new monthly payment with the adjusted interest rate. To calculate this use the calculator on my website. This will help you know exactly how much time you have. Once you know the time frame you can make a workable plan.

Step 2: Review Your Credit – Even if you have six months left before your interest rate adjusts you should still check your credit. The more time you have the more opportunities you will have to fix any potential credit issues. You are entitled to a free credit report every 12 months, take advantage of it at AnnualCreditReport.Com.

Step 2 (b): Manage Your Credit – First check for any errors in your report. If you find errors contact the creditor and ask them to fix it, they must respond to your request within 30 days (take good notes). Once you’ve reviewed errors you need to make sure you review my “Seven Ways to Destroy Your Credit” and do the exact opposite. Believe me when I say improving your credit can end up saving you thousands of dollars.

Step 3: Stabilize Your Income/Employment and Assets – Lenders like to see stable employment and at least two months of expense reserves in your account. Remember that if you are a 1099 employee you will be treated as self-employed and many programs will require you to furnish tax returns.

If you receive only cash income then you need to follow my advice on documenting cash income so lenders can establish your income stream. W2 employees need to make sure they stay that way. Lenders will frown on you if you switch from a W2 to 1099 right before a mortgage application.

Step 4: Check Your Homes Value – This is pretty important these days. The go-go days of home appreciation is behind us. Don’t rely on hearsay for this either. Just because a house five doors down sold for a certain amount doesn’t mean your house will get the same value. There is more to it than just that. Be prepared for the unexpected, but also know that there are ways for you to improve the value of your home.

If you are in the Phoenix, Arizona market, call me and I can get you in touch with a certified appraiser. Otherwise, contact a CTX Mortgage loan officer in your market and they can get you in touch with a qualified appraiser in your area.

Step 5: Review all Financing Options – Lower documentation loans with higher loan to value is difficult to obtain these days. So, the best option for you will be to go with full documentation verification. The three best options in todays market is the FHA loan, MyCommunity loan and a Fannie/Freddie fixed mortgages. If you think you qualify for Subprime to Conventional Mortgagethe FHA Secure initiative, then go through the five step checklist.

Ask your mortgage person lots of questions and don’t fall for any gimmicks (like no closing costs, no credit check etc.) Depending on your time frame don’t get rushed into something you do not understand. If you don’t understand it walk away from it.

As you can see these six steps can position you for a very smooth transition from a subprime mortgage. Allowing yourself six months for these six steps is the surest way to a smooth transition. You will have time to work on your credit, any potential income/employment issues and also add to your savings account. If you follow my six steps you’ll be in the drivers seat and much better off on your next mortgage transaction.

H/T: Blown Mortgage for inspiring me to finally put this article together.

This site is for informational purposes only. It is not sponsored or in any way affiliated with the government. If you are in need of a mortgage loan, consult with a licensed mortgage professional. All fair housing and equal housing opportunity laws apply when applying for a mortgage or buying a home. Copyright 2012.