Refinancing: Only for the privileged few?

Sure, now is a great time to refinance - that is, if you can still qualify. Here is what lenders are looking for. Portions of this post were taken from a story by Les Christie, CNNMoney.com staff writer that was published on Feb 8, 2008.

The borrowers who need to refinance the most - because their adjustable rate mortgages (ARMs) are resetting to higher interest rates - are among those having the most trouble winning approvals. During the boom years, lenders approved most anyone with a pulse. Not so today. Mortgage brokers recognize this and are now being very selective about the clients whose applications they choose to submit to the likes of Wells Fargo (WFC, Fortune 500) or Bank of America (BAC, Fortune 500. There’s still money out there, but it’s definitely harder to qualify and the days of the 100% financing are over.

The make-or-break metric for anyone looking to do a conventional refinance right now is home equity - the difference between what is owed on a house and what the house is worth. But with home prices down, many homeowners have little of that precious commodity left. "If you have an 80% loan, with a 10% home equity loan, you may not be able to refinance," said Peter Grabel, a mortgage broker in Connecticut - especially in down markets. I'm actually seeing lots of this locally. There was a story in this mornings Free Press abut a local lady who cajoled her mortgage company into restructuring her mortgages to get out from under this problem - at least temporarily.

The bar has also been raised for credit scores when it comes to refinancing, according to Grabel. And sometimes, it's not a matter of whether someone can get refinancing but at what price. "Those with high credit scores are getting very good rates, but the lenders have heightened the requirements to qualify," said Grabel. Instead of a score of 680 for the best rate, a borrower might need 700 now. The whole FICA score thing has recently been called into question by many lenders and others, who now doubt that the Fair Issacs credit scoring system correctly evaluates mortgage risks. There is a new FICO scoring system being phased in later this year that Fair Issacs promises will do a better job of spotting risky borrowers.

Appraisals are another tool that lenders are using to eliminate unqualified applicants. Lenders are scrutinizing them to a degree unheard of during the boom. They don't want to lend $160,000 on an appraised value of $200,000 unless they're sure the house is truly worth that. Ted Grose, a past president of the California Association of Mortgage Brokers, said lenders now often conduct what he called "bench reviews" of appraisals. "They have an experienced, independent third-party go over the appraisal to make sure the numbers are accurate," he said. Grose called many of the applicants he sees "very challenging, mostly because of high loan-to-value ratios." Some companies use an automated system for underwriting reviews, but even those have been recently reprogrammed to be more thorough and tougher. And, we are in what has been classified as a “declining values” market locally, so appraisers have been instructed to be very conservative about any appreciation forecasts.

I hit clients all the time who did the 80-20 loans a few years back (an 80% first mortgage and the 20% balance on a second mortgage, so that they could finance 100%). Now they are finding that they still owe 79-19 on the house, but it is only worth 80-85% of what they paid for it, so they are upside-down and can’t refinance. There are many calls being made to the First National Bank of Mom And Dad these days, as borrowers look for ways to take those second mortgages and equity lines of credit off the books.

There was one bit of good news for homeowners last week: The stimulus bill passed by Congress late Thursday will raise the size of the loans that Fannie Mae and Freddie Mac can buy from $417,000 to nearly $730,000 in some high-cost markets. Lenders are much more willing to make loans that can be sold to these two entities in the secondary market, which will make it easier for some people to refinance. Additionally, these so-called 'conforming' loans have interest rates a percentage point or more lower than 'jumbo' loans. But even for those who'll benefit from the new legislation, refinancing will never be as easy as it used to be.

Give me a call and I’ll hook you up with Agnes Miesch, our John Adams Mortgage rep. If anyone can you find you a loan or do a refi for you, she can.