Applications for refinancing that would not have encountered hurdles in years past don’t go so smoothly anymore, as the real estate bust and economic downturn have created new obstacles for borrowers.
If you’re looking to refinance your home, here are some of the obstacles you’ll face and some ways to overcome them.
“When housing prices were trending up, appraisal value was seldom a roadblock to refinancing,” says Chris George, CEO of San Ramon, Calif.-based CMG Mortgage and secretary of the California Mortgage Bankers Association. “Today, it’s a different story.”
Homeowners are increasingly receiving lower-than-expected appraisals, sometimes because prices really have dropped, but also because of changes made to the appraisal process aimed at ensuring impartiality. “More appraisers are working in areas they aren’t familiar with and that often means they’re going to undervalue property,” says George.
The solution is to do your homework, George says. Check the website Zillow.com or have a local real estate agent pull the comps, or comparables — the recent sale prices of properties similar to yours in the area — and check out nearby open houses. Armed with that information, George says, a homeowner should have an idea about the real value of his home and shouldn’t be shy about letting the appraiser know what he’s learned.
If need be, homeowners should be prepared to challenge an appraiser who has overlooked key facts, George advises. He adds that the homeowner may need to have a second appraisal done if the first is too low.
Of course, comps might not always provide for a favorable appraisal, and George says the problem is especially common with condos today.
“Where there are multiple foreclosures or short sales in a building, there’s really no way to get that appraisal up,” George says.
Without equity, a borrower’s only recourse may be to seek a mortgage modification. But if the condo owner still has equity, George says the best solution is to go back to the lender that holds the mortgage.
“You’ll have to pester them and make a lot of phone calls, but the current lender has the most to lose,” George says. “Stick to your guns and tell them you want a refi, not a modification. If you’re persistent, you should be able to persuade them that a refi is in their best interest, too.”
Credit score dropped
While a low credit score has always been a barrier for borrowers, adjustments by credit card companies have had unanticipated results for homeowners, says Aimee Renkes, a mortgage consultant with Wintrust Mortgage in Chicago.
“When they got the mortgage, their credit score might have been fine, but today a change in their credit limit or a spike in their interest rate can have a dramatic impact,” says Renkes.
The drop may seem small — 20 points to 30 points — but it can make a big difference in the price you pay as a borrower or whether you’re able to refinance at all, Renkes says. The key is knowing your credit score and working to improve it before you refinance, she says.
“Sometimes it’s as simple as calling and asking the credit card company to bring your credit limit back up,” Renkes says. “Other times, it might involve disputing false information. Regardless, it’s important to think of credit as achieving incremental goals, because each 20-point jump will save you money.”