Ask The Expert
Ask The Expert
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.
Recently Asked...
Can I buy a home by taking over someone's mortgage?
I found a company that will sell me a list of homes that can be bought by taking over someone's mortgage. I have some credit and income issues so this would be very helpful to me. Is this a legitimate way to buy a home? Do mortgage lenders let buyers take over the payments if the seller is behind on the payments?
Taking over mortgage payments: the due-on-sale clause
Most mortgages funded in the last 10 years or so contain what's called an acceleration or due-on-sale clause. That means if the property changes hands, the entire mortgage becomes due immediately. Lenders don't want to find themselves in business with someone who may not meet their underwriting standards. While some government home loans like FHA mortgages may be assumed, unless the mortgage is over 20 years old, the buyer must qualify for the loan like anyone else.
How some people get around the due-on-sale clause
Some sellers will advertise an assumable mortgage with no qualifying, or that they'll allow the buyer to take over their mortgage payments. They try to circumvent the clause by transferring the property but not "selling" it. That dodge might mean calling the transfer a lease option, an installent sale, a land contract, a land trust or a wrap-around mortgage. These schemes are not illegal or fraudulent unless you conceal the transfer from the lender.
Could you get away with this? Maybe
If you take over payments from someone who is in default (and bring the account current) on an underwater home, the lender may breathe a sigh or relief and let you continue. But what if (when) property values or mortgage rates increase? In that case, you'd be in what's called "technical default" and the lender could choose to enforce the due-on-sale clause, meaning you'd have to pay off the entire balance immediately or lose the home. Unless you can get the lender to approve the transfer of the property and the obligation to you, you're taking a risk.
Concealing the transfer is a felony
If you try to avoid the technical default scenario by concealing the transfer, you're begging for trouble. A wrap-around mortgage, for example, involves the seller continuing to pay the old mortgage lender while you pay the seller. No transfer documents are recorded with the county.
The list is probably bogus
Unfortunately, the list being advertised is likely just a list of homes with FHA financing. You'd still have to apply and qualify with the current lender to take over such a loan, so don't waste your money.
Foreclosure sale: can you pay cash and then refinance?
I bought a home at a foreclosure sale with cash borrowed from my business. I need to put as much money back in as I can, and I need to do this as soon as possible. How soon after buying a home can I refinance it and get my cash back?
There are actually a few issues here; some need to be considered before others. So here we go:
- Is the property a home for you to live in, a vacation place or a rental? This determines what sort of refinance products you'll be able to choose from. For investment property or a second home, you'll need to refinance with conventional (non-government) mortgage lenders, and you'll be able to cash out a maximum of 75% of the purchase price. If the house is a primary residence, you may be able to refinance up to 85% with FHA or up to 90% with a VA refinance mortgage (eligibility guidelines apply).
- Do you want fast cash or more cash? If eligible for an FHA cash-out refinance, you can put up to 85% of the home's purchase price back in your pocket, but you'll need to own the property for at least six months before you're allowed to do it. With Fannie Mae's Delayed Financing Rule, however, you'd be able to refinance immediately and get up to 70% of your money back.
- What if the home's value has increased? In general, if you refinance within a year of buying a home, mortgage lenders base your loan amount on the lower of the purchase price or the appraised value. So even though you got a 15% discount by buying on the courthouse steps and paying cash, you won't get to pull that extra equity out when you refinance quickly. If you want to maximize your refinance proceeds, wait a year, and your loan is based on the home's appraised value.
This is a hot issue with investors these days because the best deals are generally unavailable to those who need to line up home loans. Investors need to recover as much of that cash as quickly as possible, so that they can turn around and buy more property.
Frequently Asked Questions (FAQ's)
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 mortgagerates, and be prepared to pay extra origination fees in addition to your down payment. While you won't find many private lenderswilling to finance more than 80--90% of your home's value, investigate FHA and other community homebuyer 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.
