The Wild Cards of Refinancing

Jokers In years past, refinancing was a fairly simple task.  Homeowners would contact me wanting to restructure their mortgage to either reduce their monthly payments or perhaps to take equity to improve their home or pay off debts.  Back then, a 680 credit score was considered decent (anything over 720 was great) and people had a good idea of what their homes would appraise for and if they didn’t, I could usually determine a value by obtaining sales comps from a title insurance company.  It’s just not so anymore.  Refinancing can be trickier because there are “wild cards” involved that may not be revealed until you are deeper into the transaction.

Credit Score.  Your rate with a conventional mortgage is impacted by your credit score.  Lenders use the middle score of a borrower and if there are two borrowers, the lowest middle score will determine your rate (along with other factors).   Low-mid credit scores of 740 and higher receive the best rate available.  If your middle credit score is 720-739; you’re paying 0.25% higher in fee (may be absorbed in the rate) with an 75.01-80% loan to value. Just the fact that it’s the middle score that’s being used is a “wild card”…at least the score used is determined in the beginning of the refi process.

Appraised Value.  The lender views the value of your home based on what homes similar to yours have recently sold and closed for–this is referred to as a sales comparable or comp.  In a market with fewer sales, there’s less for the appraiser to work with.  Factor in that many of the sales that are taking place may be short sales or foreclosures–or sellers who have greatly reduced prices and your home is probably appraising for less than you expected.  Since appraisals are based on closed sales, there will be a lag time once the market turns around and home values stabilize.   There is no way for lenders to know for certain what your home will appraise for until they have the appraisal.  Thanks to WaMU and the New York Attorney General, mortgage originators are not allowed to ask appraisers for a “value check” to see if the home will come in at a value which will support the refinance.  Unfortunately, appraisals are generally provided about 10-14 days into the refinance transaction.  Worse case scenario, if an appraisal comes in low enough to “kill” the refinance, the borrower is out $400-$500 (the cost of the appraisal).  So far, I’ve experienced rates being re-priced due to lower than expected home values.    UPDATE 6/28/2010:  HOME AFFORDABLE REFINANCES (HARP 2.0) ALLOW EXPANDED LOAN TO VALUES AND SOMETIMES WAIVES THE APPRAISAL REQUIREMENT.

Employment. Many of our local employers are reducing staff in this economy.  If we are relying on your income for qualifying, a verification of employment is done prior to funding your new mortgage.  Sadly, even if the refinance is going to put you in a better position by reducing your monthly payments, without the income used for qualifying, the transaction will be put on “hold” until you secure new employment in a similar field.

Underwriting guidelines.  Lenders and private mortgage insurance companies continue to tighten up their guidelines and/or adding price hits to certain mortgage scenarios possibly making refinancing less attractive (such as the 0.75% hit to fee condos have if they have less than 25% equity based on their appraised value).

The bottom line is the longer you wait to refinance, the higher the odds are that the deck will be stacked against you.

If you’re considering refinancing your home located in Washington State, I’m happy to help you.  You can apply on line clicking here.  If your property is not located in the State of Washington, please find a local mortgage professional to help you.

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