Princeton Capital Blog

The New Rules of Refinancing

January 31st, 2013

House with money over whiteThe New Rules of Refinancing

Despite a historic low in interest rates (some as low as 3% on a 30 year fixed), the number of new loan applications is lower than you would expect.  Core Logic, a mortgage data firm, is reporting an uptick in refinancings in 2012, yet the number is lower than in past booms.

From their January Pulse report:

CoreLogic®(NYSE: CLGX), a leading provider of information, analytics and business services, today released its January MarketPulse report. The report indicates the CoreLogic Home Price Index (HPI®), which is based on repeat sales, increased 7.5 percent in 2012, the largest increase since 2006. In 2013, CoreLogic projects home prices to rise 6 percent due to greater affordability fueling steady demand, a lower level of real estate owned (REO) sales and a low inventory of unsold homes.

Despite improvements and a positive outlook for the coming year, uncertainty remains on the impact of qualified mortgage and qualified residential mortgage requirements.

Kiplinger reports that part of it is due to people feeling like they just refinanced and are content with a 5%.  Also:

But a lot of borrowers face serious obstacles to lowering their rate. Six years after the housing bust, mortgage lenders are still skittish about making loans. Even the biggest banks, now enjoying record profits, worry that if their loans default, the agencies that guarantee them—Fannie Mae, Freddie Mac and the Federal Housing Administration—will find errors in underwriting and force the lenders to buy back the loans and swallow any losses.

And as we’ve mentioned before, there will be new rules and regulations for mortgage loan approval.  It’s this uncertainty of what the Government may do that is leading to mortgage companies creating stiffer requirements of their own.  And despite increases in home prices, approximately 20% of all homeowners are still underwater and can’t refinance unless they qualify for the Home Affordable Refinance Program (HARP) or FHA Streamline.

So what’s this mean for you?

Also from the Kiplinger report on Yahoo Homes:

You’ll need at least 5% to 10% equity in your home to get past the application process. (You can find a rough estimate of the market value of your home at Zillow.com. Even better, ask a real estate agent, who may get your business down the road, to provide a market valuation of your home based on recent comparable sales.) To make a refi worthwhile, you must keep your house long enough for the savings in monthly payments to cover the closing costs (closing costs average 2% of the loan amount, according to Bankrate.com). Beef up your credit profile if you can, and prepare to fork over heaps of documentation.

Also, double check your credit report and score from all three reporting agencies.  As we talked about prior, it’s a good idea to clean your report (if needed) at least 3-6 months before you apply for a loan so that all of the changes can have time to filter through.

More from the Kiplinger report:

To meet standards set for refis by Fannie Mae and Freddie Mac, lenders expect you to have a FICO credit score of at least 660 to 680, a housing-debt-to-income ratio of no more than 28% and a total debt-to-income ratio of 36% or less. Your likelihood of nabbing the best rate and lowest closing costs goes up with a high credit score, an unblemished credit history, low debt and a high percentage of equity in your home. It also helps if the home is your primary residence, you take a shorter term (15 or 20 years) and you have sufficient financial reserves.

One thing that could disqualify you immediately is your mortgage payment history, says Ramez Fahmy, of Caliber Funding, in Bethesda, Md. For example, recent mortgage payments that were late by 30 days or more will give a lender pause. If you have a second mortgage or line of credit, that lender will have to agree to “resubordinate” its right to repayment behind the new first-mortgage lender if you default.

If your credit is less than stellar, it pays to check out smaller banks, credit unions and mortgage brokers who can help you find a loan program. Multiple credit checks won’t diminish your credit score if they occur within a three-week period, but Nicol suggests that you add a buffer by completing the task in two weeks.

And the other major key will be your home valuation.  We talked before about how to improve your appraisal.  If you don’t, you can look into PMI.  We will discuss this and how to refinance when your home is underwater in a future post.  Please post any specific questions so we can be sure to address them.

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