Why is your credit score so important when refinancing your mortgage?
Homeowners across the country are lining up to take advantage of low mortgage rates and try to refinance their existing mortgage. Many are finding that the rules have changed and lenders require much more documentation to qualify. Great rates and refinancing programs are still available. You may be required to provide much more documentation than in previous years. Here’s what to expect the next time you call your mortgage broker or lender.
Credit score requirements have increased dramatically. In previous years, a score above 600 virtually guaranteed you a refinance. Now, a minimum credit score of 660 is required with most lenders for a conventional refinance. FHA requires a minimum score of 620 with most lenders. There are some lenders that still offer FHA loans as low as 580, but they are few and far between. Be sure to get a copy of your credit report and review it for accuracy. A small error on your report can be the difference between refinancing your home loan and being turned down.
Even if you meet the above criteria, you will still have to deal with some changes regarding fees. The lower your credit score, the higher the rate you can expect to pay. This simply means that a credit score of 660 will pay a slightly higher rate, or more points, than a borrower with a score of 760. Lenders refer to this as risk-based pricing. The higher the risk, the higher the rate or premium you will pay.
Another refinancing change that has surprised many is the additional cost of “cash out” refinances. A cash-out refinance is one that allows the borrower to refinance and get more cash out of the transaction. In the past, homeowners used their home as an ATM, drawing capital whenever major expenses arose. Now, with higher foreclosure rates and borrowers across the country delinquent on their mortgages, lenders are wary of allowing borrowers to take cash out of their home. Most lenders now limit this amount to 85% of the home’s value and charge a high premium to do so. Expect to pay at least 1/8 of the higher rate when you try to get cash out of your house.
Current home equity lines or second mortgages will be considered “cash-out” in many cases. If you purchased or refinanced your home and then obtained a second mortgage or line of credit after the initial transaction, paying it off in a refinance will now be considered “cash out.” If you obtained the mortgages at the same time and closed the transactions at the same time, you will not be subject to the higher rates and will qualify for a lower mortgage rate.
Your home’s value may have decreased and lenders will look at your appraisal. High foreclosure rates and borrowers having difficulty making payments have added more value to the appraisal. You can no longer look at all the home sales around your home and pick the highest to determine value. Short sales, foreclosures, a larger inventory of homes on the market, and fewer buyers are just a few of the reasons we’re seeing lower appraisals. Don’t take it personally, your house has gone down in value just like everyone else across the country. Over time, you will see the value increase… but not at the rate it has in the past.
There is a new appraisal procedure and most brokers, lenders and borrowers are not big fans. HVCC’s new appraisal order process requires brokers and lenders to request an appraisal from an approved list of appraisers selected by the lender. There is no contact between the loan officer and the appraiser, and the loan officer most likely does not know which appraiser will be providing the service. The program was put in place to protect lenders and borrowers from loan officers who pressure appraisers to “hit” a specific number. The concept is a good one, but so far it has created some headaches such as loan officers not getting the level of service they had in the past and less qualified appraisers, just to name a few. Expect to pay for your appraisal by credit card, and expect your loan officer to ask for your credit card information early in the process.
Assets are important to qualify for a mortgage, but they are not enough to qualify you alone. Many borrowers trying to refinance a home mortgage have found that large investment, retirement and savings accounts are not enough to get approved by lenders. Many borrowers with liquid assets greater than the balance due on the mortgage have been denied due to income requirements. Declared loans no longer exist! You must show that you have monthly income and you must show that you can pay your mortgage payment plus any other debt that appears on your credit report. A two-year employment history is also an important aspect in qualifying for the loan.
Changes are taking place in the mortgage industry and each lender has different requirements. Working with a qualified mortgage broker who can shop multiple lenders for programs and the lowest rates is a great place to start. Expect to go through a few more hoops than in the past, but understand why your broker or lender is asking you for this information… no one wants you to be the next enforcer on the block!
