Buying a Fixer-Upper? There's a Special Mortgage for You

Can Energy Improvements Keep Me from Refinancing My Home?

Dear Liz,

Current mortgage rates in California have dropped very low and I want to refinance my property. I have excellent credit and there is still quite a bit of equity in my home. But when I went to my local bank, I was told that I won't be able to refinance (or probably even sell!) because I participated in a plan that let me add solar panels to my home. Why should this make my place impossible to refinance? Will all lenders refuse to refinance me?

Sam in San Diego

Dear Sam,

I think what you are having a problem with is a Fannie Mae and Freddie Mac policy. They buy most of the mortgages being underwritten today, and many lenders will not fund a home loan that doesn't meet their guidelines. The monkey wrench in refinancing your home is this--when you participate in the solar panel program (called Property Assessed Clean Energy [PACE]), you get a government loan for improvements that is repaid over twenty years when you pay your property taxes. The idea is that you only pay for the improvement while you own the property; then the next person to buy your home pays as long as he or she owns it. It's a way to buy solar energy and other energy-saving improvements without having to worry about living in the property long enough to recoup your investment.

But when you enroll in such a program, there is a lien against the property until the loan is repaid, and because it's a government lien, it is positioned first, ahead of any refinance mortgage you would like to take out. Fannie and Freddie refuse to take second position, because if you were to default, they would only get paid after the government. They refuse to take that risk.

With more than 20 states implementing some form of PACE program, this spells big problems. Since May, when this policy went into effect, lenders have told PACE program participants that their energy loan must be paid off completely before the property can be remortgaged--either as part of a refinance or sale. Some localities have suspended their energy programs until this shakes out.

However, there might be a solution very soon. On July 2, Energy and Commerce Committee Chairman, Howard Waxman, and Financial Services Committee Chairman, Barney Frank, told the housing finance agency to provide a plan to resolve this problem by July 12.

In the meanwhile, there are institutions that hold their own loans and do not sell them to Fannie Mae or Freddie Mac. Given your solid equity position and excellent credit, you'd be a good candidate for these lenders. You could also consider an FHA mortgage; the downside of an FHA loan is that you'd pay an upfront mortgage insurance premium even though you have equity. The upside is that FHA loans are assumable, which might help you sell your home faster and get a better price in the future. Current mortgage rates are so good, I can see why you'd want to act quickly.

Using the 2010 Good Faith Estimate to Get the Best Mortgage Rates

Dear Liz,

I am shopping for a mortgage for the first time in many years. I understand that many things have changed recently, and that the standard mortgage disclosure forms are different. I even heard that they are supposed to save me $700! How do I get my $700, and what else do I need to know about the forms?

Jed, MO

Dear Jed,

I think what you are referring to is HUD's estimate of what the new Good Faith Estimate (GFE) disclosure can save the average mortgage borrower by making it easier for them to comparison shop for a loan. The new form does make things easier in the following three ways:

1. It puts the most important features of a mortgage, like rate adjustments and prepayment penalties, right up front where they are easy to see. Before, these important provisions were hidden away in special riders.
   
   
2. It details the costs of the loan, including title and escrow charges, and the estimates must either be exact (for the loan origination fee , for example) or within 10% (for title insurance and other charges). This is intended to eliminate the oft-voiced consumer complaint that actual expenses bear little resemblance to those disclosed upfront.
3. It discloses an interest rate and tells you how long that rate quote is valid.

However, reports thus far show that the 2010 GFE is not fool-proof. Many folks find it confusing and title companies report an increase in questions from confused borrowers.

What the New GFE Doesn't Do

It doesn't catch a moving target. Mortgage interest rates change with financial markets, which move continuously. So even if you contacted several lenders in a short time (using a website like this one or calling them one by one), there is little guaranty that you can compare the GFEs side by side because they correspond to different times.

It doesn't guarantee an interest rate. Only when your rate is locked do you have a commitment from the lender that can be enforced. And even then, if circumstances change, for example if your home appraises for less than expected, your credit score drops, you choose a different mortgage program, or your employment changes, you may be looking at a different interest rate. So once you're ready to lock in an interest rate, you may want to compare rates between your lender and a few competitors.

It also doesn't force a lender to commit while you are just shopping. To issue a new GFE, the lender requires rather personal information from you. Loan pricing depends on (among other things) how you plan to use the property, your credit score, and the size of your down payment. If you are purchasing a home and don't have a property address yet, your GFE won't be worth the paper it's written on because you need a property before you can lock in an interest rate. And remember, your lender isn't committed until you lock an interest rate.

Finally, the lender isn't required to give you a GFE until you actually apply for a loan, and it has three business days from that time to get you the disclosure. While many are willing to provide it earlier, others may refuse to do so, or may try to fob you off with a "loan scenario" or other such proprietary form. Understand that this commits them to nothing; if you are willing to provide the information necessary to issue a valid GFE, any lender worth working with should be willing to supply the official form.

I'm finally ready to buy my first home. How will the current economy affect my mortgage rates?

That depends on how much cash you're willing to pay up front and how well you've managed your money over the past few years. According to many experts, mortgage lenders have "rolled back" to the policies and protocols they used decades ago. Hoping to avoid the kind of lending that led to the subprime mortgage crisis, most lenders require higher down payments and higher credit scores from borrowers than they did only a few years ago.

If your credit has a few dings in it, don't worry. Be prepared to lock in something higher than today's best mortgage rates, and be prepared to pay extra origination fees in addition to your down payment. While you won't find many private lenders willing to finance more than 80--90% of your home's value, investigate FHA and other community home buyer options. You can use a stable employment history and community connections to find a fair financing deal.

Although I've made every mortgage payment on time for the past five years, our whole neighborhood has lost value and I'm upside down on my home loan. What should I do?

In certain cases, you might not have to do anything. If you locked in a solid mortgage rate during a previous period of low interest, keep making your payments. As real estate values normalize over time, you'll eventually regain home equity.

However, if your credit score is better now than it was when you originated your home loan, you may want to lock in today's best mortgage rates. Or you may qualify for a government-backed plan that can help your mortgage lender process a refinance. FHA, Freddie Mac, and Fannie Mae all have special money-saving programs. If your mortgage is backed or held by these entities and you meet some other qualifying criteria, you can cut the amount of interest you'll pay over the life of your loan.