Dear Dr. Don,
I was told by a lender that it can’t do a refinancing on our townhome — which we recently placed up for sale — worth $188,000. We wanted to get $55,000 cash out from the financing. We don’t currently have a mortgage.
The lender rejected the refinance, saying it doesn’t refinance on properties currently listed for sale or listed in the past six months. Is this true of all mortgage refi loans, or just Freddie and Fannie? How about FHA?
— Verna Vexation
If you don’t currently have a mortgage outstanding, you aren’t refinancing a mortgage. By your estimate, you certainly have the equity in the home to justify taking out a $55,000 first mortgage.
Limits placed on refinancings may not be germane to your situation. Lenders will, however, still be concerned with the borrower’s motivation in tapping home equity with a new first mortgage on a home recently listed for sale.
Lenders originating mortgage loans for Fannie Mae or Freddie Mac won’t approve a mortgage if a home is listed or has been listed with a multiple listing service, or MLS, over the past six to 12 months. The lenders struggle with why they should loan money to people who were (or are) actively considering selling their home.
In general, it takes several years occupancy for the homeowner to justify paying the closing costs associated with a refinancing — or, in your case, a financing. The lender has that type of break-even cost to consider as well.
While I can’t find the specific language on the FHA website, there are several FHA lenders on the Web that state that recently listing your home for sale does not automatically disqualify you from financing with an FHA loan.
You may find it easier to borrow with a home equity loan or a home equity line of credit. These rates aren’t as attractive as a new first mortgage but may allow you to finesse the listing issue.
Alternately, working with a mortgage broker to find a third party lender could also allow you to finesse the listing issue. There may be a price to pay in terms of higher costs and a higher interest rate.
In the end, you want to balance the costs of financing against the interest rate and the amount of time you expect to be in the home. Bankrate’s mortgage calculators can help you determine the lowest-cost approach from the options before you.
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