Refinance Pitfalls That Can Cost You Cash

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We brought up the topic of refinancing in a post last month, and listed four reasons why this might be a smart move for you as a borrower. If you’ve decided to refinance—to lower your interest rate or lock in your current rate—now all you need to do is visit your lender, and tell them to get you the paperwork, right?

Not quite. Just like with your initial mortgage, you need to qualify for a refinance. Many borrowers won’t struggle with this but there are a number of circumstances that may cause you not to qualify. We’ve listed the most common causes for why applicants can’t access a refinance, as well as what you can do right now to fix the problem.

Changes in Credit Score, Income, or Job Status

You may recognize these three categories: We almost always emphasize the importance of your credit score, income and job status in our blog posts and video entries. Truly, nothing is more important for determining whether you’ll qualify for a mortgage.

These things are unlike a fixed interest rate, however—they don’t lock in when you sign the paperwork for your mortgage. Changes in these factors won’t impact your mortgage, as long as you have been able to maintain your payments. However, if you’re looking to refinance, the effect of these changes could rear its ugly head.

If you’ve changed your career path between applying for a mortgage and applying to refinance, consider how your income has changed. This could affect your income-to-debt ratio, which in turn affects what you qualify for. Also remember that, even if you foresee your current position as a steady career option, lenders won’t necessarily agree unless you’ve been employed there for two years. If you’ve kept up with your home payments, it’s unlikely that your credit has sunk much. However It’s also important to give the same attention to other payments, such as automotive, utilities and credit card bills.

WHAT YOU CAN DO: There are no quick solutions to these problems, but you can work on them over time. If credit score is an issue, check out our tips for improving your credit score quickly. If income is an issue, consider bringing on a cosigner to add their salary to your total debt-to-income ratio (you can read more on that solution here). If you’ve switched jobs, there’s a decent chance that it won’t negatively impact your DTI. However, you may just need to be patient and wait until you’ve been in the position for two years.

Your Loan-to-Value Ratio is Too High

The factors listed above may come into play when applying for a refinance, however they’re more common during the initial mortgage application process. When it comes to a refinance, having a loan-to-value ratio that’s too high is among the most common reasons for rejection . This means that the amount you owe on the home is more than the actual value of the property, frequently referred to as being “underwater.”

This problem became somewhat severe during the previous housing boom, when many buyers opted for interest-only or negative amortization loans. Interest-only means that they only made payments on the interest of a mortgage, saving significant amounts from not making payments on the actual home. This can potentially save you thousands every year, however you would own no equity in your home unless its value went up. Most assumed that their homes would appreciate. When they didn’t—and some homes even decreased in value—those buyers were left underwater.

Negative amortization loans allowed borrowers to make minimal initial payments, as they wouldn’t be paying off the interest on the loan at the onset. This essentially resulted in interest on the interest of the loan, leaving some borrowers owing more than the value of the home.

WHAT YOU CAN DO: The Home Affordable Refinance Program (or HARP) was founded to help those trapped underwater after the housing bubble find more ideal rates. However you must act upon this program as soon as possible, as it’s set to expire on December 31, 2016.

More money does indeed mean more problems, if your loan value is too high to refinance.

More money does indeed mean more problems, if your loan value is too high to refinance.

Your Loan Amount Is Too Big

This is a problem that comes into play more often with Jumbo loans, or those that surpass the typical $417,000 maximum on conforming loans. The downside that comes with exceeding the limits of conforming loans is that the borrower will also potentially deal with higher interest rates and tougher qualification standards.

Jumbo loans are considered non-conforming, which means they aren’t sold to Fannie Mae or Freddie Mac. The guidelines for dealing with them can vary widely from one lender to another.

WHAT YOU CAN DO: A cash-in refinance is one option here, as it allows you to essentially put another down payment on your home, taking a significant chunk out of the existing mortgage upfront with cash so that your new mortgage qualifies for conforming loan. Another option—perhaps even before financing with a Jumbo loan in the first place—is to consider breaking the large amount into two, separate mortgages if those terms are better. You can save yourself some headaches by having all the necessary paperwork—including bank statements and tax returns—ready in advance, in order to prove your good credit. Much of the trouble behind refinancing a Jumbo loan is due to changes instituted by the Consumer Financial Protection Bureau.

You Tried to Sell It Recently

So you tried to sell your home and then found out that no one was interested. This is perhaps the least convenient time to begin pondering a refinance.

First, lenders could be suspicious of your intent. You’ve just tried to sell your home and now you’re looking to refinance it. Is your ultimate goal to pay off your new loan as quickly as possible by selling the home, thus minimizing future interest payments?

A good rule of thumb to keep in mind is that you should expect to wait six months to refinance after a home has come off of MLS (Multiple Listing Service).

WHAT YOU CAN DO: First, make sure that you look into the housing market before you try to sell your home. Assuming that you’re past this stage, the best you can do is un-list your home and then shop around. Some lenders will be more forgiving of the listing than others, offering refinancing as soon as one day after MLS. Understand, however, that the guidelines for these services will be more strict than otherwise. It won’t hurt to outline an argument for why you changed your mind on the sale…the more convincing you are that finances wasn’t the issue, the better your chances.