Fewer homeowners are refinancing
The share of mortgage refinances has dropped considerably in the past year. Smart borrowers should know their options.
There were a lot of positive changes in the mortgage world last year: Foreclosures declined, property values increased, interest rates maintained historic lows and home sales climbed. As the recovery plowed ahead in 2013, home sales dominated new loans, making up 49 percent of new mortgages in the fourth quarter of 2013, up from 25 percent in the same period the year before.
The rest of those originations come from homeowners refinancing their mortgages. Refinance activity drove new mortgages in 2012, according to the Experian-Oliver Wyman Market Intelligence Reports and Experian's IntelliView tool.
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It makes sense: In the last quarter of 2012, mortgage rates averaged 3.36 percent, according to Freddie Mac, and they finished 2013 at 4.3 percent. Rates have fluctuated in the past several months with the Federal Reserve starting to taper its economic stimulus measures, but, in general, they're trending upward. With interest rates on the rise, refinancing may not be as appealing now as it was in 2012.
Increased access to home loans likely contributed to the higher share of new loans last quarter, as well. In 2012, the average FICO score on a completed mortgage was 748, and that average dropped to 727 in 2013, according to Ellie Mae's Monthly Origination Insight Report.
If you're considering applying for a mortgage in 2014, whether to get a purchase loan or to refinance, there are a few things you can do to make sure the process goes as smoothly as possible.
Check your credit
If you do the legwork ahead of time, you'll be able to approach the mortgage-application process as a prepared, empowered consumer. You'll want to check your credit reports to make sure they're free of errors (credit report mix-ups are fairly common), and you can get a free annual report from each of the major credit-reporting agencies.
You'll also want to see where you stand with credit scores, because you don't want to apply for a loan you won't get. Regularly checking your scores will give you an idea of where you fall in the credit-score spectrum: Prime, near prime, subprime and so on.
Make necessary changes
Once you look at your scores, you'll be able to see which areas of your credit profile need attention in order to boost your scores. For example, if you see low grades in your debt usage or payment history, you can start improving your scores by immediately working on paying down debt and making sure all your bills are paid on time. You want to present a lender with the best credit score possible when it comes time to apply for a mortgage.
Lenders are required to document a lot of things when processing your mortgage application, especially now with the qualified mortgage rules that went into effect this year. It's crucial to show your ability to repay your loan, so make sure you can accurately document your income and debt obligations that will affect your ability to make mortgage payments.
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Banks across the country experienced a massive decline in revenue beginning in the second quarter of 2013 and, depending on how prepared a bank was for this economic environment, they are still seeing declining revenue. Many mortgage banks and brokers are closing branches because they were not prepared, and the most common way of not being "prepared" was to rely too much on refinance business. As in any business, you can increase profits by either decreasing expenses (including labor) or increase sales. Of course, mortgage lenders would prefer to not have go through massive layoffs but unfortunately this is one tool that is currently being used by mortgage lenders right now. Allow me to outline the two other common ways that mortgage lenders are aiming to maintain profits right now, which are methods to increase sales:
1) Recruit Recruit Recruit! Most loan originators / officers are almost 100% commission-based, so why not go out and get more people (especially when other lenders are shutting their doors)? Mortgage lenders are recruiting heavy right now, and not just the ones who are seeing a huge decline in sales. Smart managers see this time as a good opportunity to pick up some good commission-based mortgage loan officers that are suddenly out of a job.
2) Lower mortgage standards. Yes, even with all the talk about these new "qualified mortgage" rules that are now in place, the fact of the matter is that most lenders were funding almost nothing but "qualified" mortgages anyways, so this is not a big deal. In 2012 and 2013, many lenders required a minimum credit score of 640 for a loan. If you do a bit of research, you'll find that many lenders will accept a 620 credit score, plenty will go down to 600, and some will go down to 580 on certain types of loans (most common would be FHA and VA).
As a loan officer myself, when I have a situation that we cannot approve OR if I cannot offer a rate that is low enough for a refinance to make any financial sense, then I direct the customer to RateBid.com. The site allows my clients to quickly (the form takes about 30 seconds to complete) request PERSONALIZED rates (unlike your typical mortgage ad that assumes you're the perfect borrower) while staying ANONYMOUS.... and, the site encourages mortgage loan officers to manually engage in "bidding wars" between each other (which is sort of entertaining for borrowers to watch). There is no "winning bidder", so ultimately the site lets borrowers "zero in" on a lenders that believe they can approve the scenario AND, out of those lenders, which ones can offer the best mortgage rates (and lowest fees).