Refinancing your home can be a tricky and complicated process. However, those in need of restructuring can streamline the procedure by being prepared. MainStreet is helping out homeowners by identifying some common roadblocks to refinancing. We’re all offering some suggestions about how you can get around them.
A DECREASE IN THE MARKET VALUE OF YOUR HOME
Thanks to the current housing market and the subsequent decrease in property value, many homeowners incorrectly appraise the value of their houses when applying for a specific refinancing loan.
“Clients have an idea in their head based on a previous appraisal from a year ago or based on what they paid for the house,” mortgage consultant Jeff Tufford tells MainStreet. “In reality, lenders have appraisers derive the value based solely on what similar properties in a certain time frame and within a certain distance have sold for.”
While an inaccurate estimation of a house’s worth is the most common of all refinancing roadblocks, it is also easily circumvented. Dominick Sutera, Director of Business Development for Academy Mortage Corporation and certified mortgage instructor, suggests that homeowners ask their local real estate agents to prepare a Competitive Market Analysis (CMA) so they can get a good idea of the current market value of their home.
“This is a free service that real estate agents offer,” Sutera explains. “It should be more accurate than using Web sites (for the appraisal).”
HIGHER CREDIT SCORE REQUIREMENTS
A low credit score and an accompanying incurrence of debt will make refinancing more difficult on any owner. What complicates the process currently is that credit score requirements for many loans have significantly increased.
“A few years ago, 620 and above credit scores were considered excellent,” Sutera says. “Today, a score must be 740 to be considered excellent and a score of 620 will be declined by most lenders.”
Homeowners also need to understand that consumer-oriented Web sites, like Freecreditreport.com, may not be giving them an accurate representation of what applicable credit score, since the mortgage industry uses a different scoring model than these sites. Sutera suggests asking a loan officer to tell you your representative credit score.
“If your credit score is going to cost your rate to go up a painful amount, ask the loan officer if they can run an automated credit analysis to see what might be done to increase your credit score,” he says.
“Last year, I was told by a mortgage broker than even though I have a high credit score and a solid credit rating, I could not qualify for a refinance,” homeowner Peggy Kenny tells MainStreet. “The broker said she had tried several times with other self-employed clients, all with fine credit ratings and all were turned down.”
These days, Kenny’s story is actually fairly common as more underwriters are using tax returns to determine an applicant’s qualifying income.
“Using a tax return to establish cash flow and qualifying income is counterintuitive,” Gary Parkes, a mortgage broker for Acopia Home Loans, tells MainStreet. “A tax return is designed to make sure you get credit for certain expenses and is used by many to reduce their tax liability.”
Because of this, many prospective refinancers, specifically self-employed, contract or commission employees, inadvertently reduce their qualifying income while lowering their taxes, which makes it harder to get approved for certain loans.
“The problem for many is that underwriting typically will review your two most recent years' tax returns,” Parkes says. “If there is a likelihood of refinancing or purchasing a home within the next few years, it may be beneficial to assess the big picture and possibly take less tax deductions.”
MISSING OR UNWILLING PERSONS
Homeowner Hatti Hamlin ran into an unexpected refinancing roadblock when she was about 80% through the process. Her bank asked for proof that her ex-husband had no claim to her home.
“Fortunately for me, I am on relatively good terms with him and he was willing to sign the quit claim deed,” she tells MainStreet. “However, I can imagine many, many situations where an ex could refuse to sign.”
Indeed, the existence of an uncooperative third party can stop your refinancing attempts almost instantaneously as any co-owner must agree to the terms of the loan before the process can move forward. What complicates things (beyond a tenuous past relationship) is when prospective refinancers can’t locate the person with whom they bought the property.
“One of the strangest things that can prevent you from refinancing is the inability to locate one of the homeowners on record,” Parkes says. “Many people purchase real estate with someone to who they are not married. If a relationship ends, it may be difficult to locate the other owner.”
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