Current mortgage rates remain remarkably low, but you may be hesitant to attempt a refinance because you've heard (correctly) that refinancing can be more difficult since lending criteria have tightened. Don't be discouraged! Not refinancing when you are able may mean leaving money on the table.
Challenge 1: Mortgage approval is a moving target
In the past, anyone with at least 10 percent home equity or down payment and a credit score over 640 had a good chance of mortgage approval, and a score of 680 was good enough for almost any program. Then, the backlash against easy underwriting approval bumped minimum scores to 700 and down payments to at least 20 percent. Today, if you want the best mortgage rates, you may need a score of 740! What can you do?
- Check with a couple of types of mortgage lenders: at least one broker, at least one bank, and at least one FHA-approved lender. Have them run your information through their automated underwriting system (AUS), which only takes a few minutes. You'll know right away if you can be approved for a program, or, if you can't, what you need to change to get approved.
- Consider a 15-year loan. If your credit is borderline but your income is stable and healthy, consider a 15-year loan if the 30-year is out of reach. These programs are a bit less risky for lenders because you amass equity faster; the benefit for you is a mortgage rate about half a percent lower than that of a thirty-year loan.
- Try an FHA loan. If you can get approved but will be charged extra for risk-based Fannie Mae or Freddie Mac adjustments, try an FHA loan. FHA does not charge extra based on credit scores, loan-to-value ratios, or property types.
Challenge 2: Financing condominiums
Condos are the ugly stepchildren of the real estate world these days. It seems no one wants to finance them without creating a huge fuss and perhaps charging extra. Freddie Mac is now alone in approving individual condo units, since the FHA no longer issues "spot" approval for individual units; instead, the entire complex must pass muster and be on the FHA-approved list. Fannie Mae is similar, requiring, for example:
- No more than 10 percent of the units be owned by a single entity
- The complex be largely owner-occupied
- No more than 15 percent of units be delinquent on HOA dues
- No more than 20 percent of the space be allotted to commercial enterprise
If purchasing a condo, try to choose one listed by the FHA or a GSE. It will make your life easier, and make selling easier too. If selling one, get your HOA to take care of the paperwork and get approved; being able to advertise that your unit is in an approved complex will give you an edge. If refinancing, you can do a streamlined transaction without the entire complex having to go through the approval process.
Challenge 3: Appraisals
Appraisals are giving home sellers, buyers and refinancers lots of headaches. The Home Valuation Code of Conduct (HVCC), launched May 2009, unintentionally resulted in inexperienced appraisers coming up with inaccurate valuations. And until recently, anyone with an interest in the transaction was enjoined from communicating with the appraiser. That has changed; there are now guidelines about communication with appraisers, and lenders are allowed to appeal values and provide additional information.
Before attempting a refinance, check with a knowledgeable real estate agent or loan officer familiar with your neighborhood. Online valuation can be useful, but more for the purpose of seeing trends (are values increasing or decreasing?) than for evaluating a specific property. Checking with several sources should give you some idea of whether your property would appraise for enough to make refinancing possible.
Use these tips to help avoid some of the common problems which may emerge during the loan process. In spite of tightened lending standards, you may still be able to take advantage of current low mortgage rates, and save substantially over the years to come.