3 refinance hurdles and how to jump them
Your loan-to-value and debt-to-income ratios are too high? Your credit score is too low? Fear not.
Low mortgage rates have made refinancing an attractive proposition for homeowners who want to cut their monthly payment, extend their term or restructure their housing debt. Yet there are hurdles that can make refinancing difficult. Here are three of the most common refinance hurdles and ways to overcome them. (Bing: Best places to refinance home loan?)
Hurdle No. 1: Your LTV is too high
Your loan-to-value ratio, or LTV, is your loan amount expressed as a percentage of your home's current value. For example, if you want to borrow $80,000 and your home is worth $100,000, your LTV is $80,000 divided by $100,000 or 80%.
A higher LTV won't preclude refinancing, but you'll probably have to purchase mortgage insurance, which protects the lender if you default on your loan.
Jump: If your LTV is on the high side, one option to consider might be the Home Affordable Refinance Program, which "allows certain borrowers who have loans that are owned or guaranteed by Fannie Mae or Freddie Mac to refinance without regard to the loan-to-value ratio," says Joe Parsons, senior loan officer at PFS Funding, a mortgage company in Dublin, Calif.
One catch, says Kirk Chivas, chief operating officer at First Commerce Financial in Wixom, Mich., is that your loan must have been originated on or before May 31, 2009, to refinance through HARP.
Two other high-LTV options might be the FHA Streamline Refinance program, if your loan is insured by the Federal Housing Administration, or a loan guaranteed by the Department of Veterans Affairs, if you qualify for that. Given its 100% financing, no mortgage insurance and flexible qualification guidelines, Parsons describes the VA loan as "the best loan on the planet, by far."
A different option would be to lower your LTV by paying off a chunk of your mortgage. This approach is known as a cash-in refinance.
Hurdle no. 2: Your DTI is too high
Your debt-to-income ratio, or DTI, measures your capacity to pay your debts. For example, if your monthly income is $4,000 and your monthly minimum payments on your credit cards and other nonhousing loans total $800, your DTI is $800 divided by $4,000 or 20%.
Lenders' DTI guidelines can be flexible, but if you're carrying a high debt load relative to your earnings, your DTI might be a barrier to refinancing.
Jump: To lower your DTI, you'll need to earn more money or pay off some of your debts. Often, however, neither of those approaches is realistic.
"Typically, there's no solution," Chivas says. "People have gotten themselves in this position due to poor decision-making or a job loss of one or two people working in the household."
Hurdle no. 3: Your credit score is too low
A third common hurdle to refinancing is impaired credit, says Joe Metzler, a mortgage specialist at Mortgages Unlimited in St. Paul, Minn.
"A standard conventional-type loan requires a (credit score of) 660 or higher to be in the game," Metzler says. "With an FHA loan, 100% of lenders will work with you if you have a (score of) 640 or higher. As soon as you drop to 639, you drop to 25% of lenders. Once you drop below 620, you drop to less than 10% of lenders. Below 600, you drop to 2% of lenders."
Those scores and percentages are approximations, yet the correlation is clear: The lower your score, the fewer lenders might approve your loan. "You're going to hear a lot of no's before you find a yes," Metzler says.
- MSN Money: Do credit scores matter if you avoid debt?
Moreover, that yes will be expensive due to so-called price adjustments that lenders apply to loans they deem riskier.
Parsons says the adjustment might be as much as 3% of the loan amount, or about three-quarters of a percentage point on the rate, for a score in the 620 to 639 range.
Jump: To avoid a price adjustment, you'll have to boost your credit score by using credit more responsibly.
Parsons says it's also worth the effort to try to negotiate with your creditors or collection agencies if you have past-due balances or delinquent accounts. Ask for what's called a deletion letter, which says your account has been paid in full and the negative item should be removed from your credit history.
While each of these hurdles can be a high obstacle to clear, the right loan product and financial planning can help you achieve your goal of refinancing your mortgage.
So what options are there if you have an owner carry and he doesn't want to refi? So far I have found that banks look at this as a new purchase for them therfore you have to meet their down payment of 20-25% for a home that we already are paying on. In order for any of the programs to work, we would have to already have been financed through a fanny mae etc.
Looking for help! We make the payment now and don't want any cash out, just a lower payment for being retired.
I am glad that we don't have to mess with home financing in this day. Our home has been paid off forquite a few years now, and the last place you want to finance anything is through a bank. The way these institutions "sell" loans and other such nonsense is rather questionable.
Okay, what if your scores are both over 908 but the modular home is called a "mobile home" in California. Nobody will refi a mobile home.
Said mobile home is on a foundation, stucco, tile roof and over 2600 sq. ft. with views and 5 acres. Doesn't matter.