Can you refi when you’re upside down?

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Recently Bankrate’s Holden Lewis answered common questions about refinancing.

In this article, he answers questions about falling home values and how to qualify for a refinancing. The broad question was developed from specific situations readers described to him. Over the next few weeks, he’ll be answering questions on many aspects of the refinancing dilemma. Lewis’ blog, Mortgage Matters also provides answers and insights on the mortgage crisis.

FAQs about refinancing mortgages: Part 2
  • What happens when the home’s value has fallen?
  • What are the potential problems with qualifying for a refi?
  • Is a down payment necessary?

What happens when the home’s value has fallen?

Q: House values are dropping, so I’m not sure if the appraisal will be enough. Are the values based on sales? So that means even with the lower rates, I may not be able to refinance? Is that true?

Q: I decided to refi my first and second mortgages. I had a good rate of 5.5 percent. Then the appraisal came in at $60,000 less than expected. Now I’m stuck because the equity/mortgage basis puts us in the PMI penalty. Online calculators don’t account for what will happen if the local housing market has taken a 5 (percent) or 10 percent hit since you bought your property.

Q: Is there any way around a situation where your credit is great and you’ve been approved for a mortgage, yet the appraisal of your house will not come in high enough?

Q: My husband and I “mistakenly” refinanced last April into an option ARM. Now that we realize the nightmare we are in, we would like to refi again into a 30-year fixed. Based on our income and good credit, qualifying may not be a problem. The problem is that our loan balance currently exceeds what our home would now appraise for, since values have dropped drastically since 2005, when we purchased the home at the height of the market. Are there any programs out there for people like us that have a loan-to-value exceeding 100 percent?

Q: I am looking to refi before my mortgage reset in June. However, I cannot get a loan through Wells Fargo because of the amount I owe versus the value of my property is higher, about $25,000, based on the comp in San Diego. So, the bank wants me to come up with the $25,000 and they will process my loan. My FICO is 760, income is good. What should I do? If I can’t get a refi going, I don’t think it is worth paying the reset amount then. Is walking away from all this my best solution? Or what other suggestion do you have?

Holden Lewis: When you’re buying a house or refinancing a mortgage, it’s easy to get caught up in your own point of view and ignore the other guy’s perspective. You want a house, or a lower mortgage payment, and an appraiser is standing in the way.

Look at it from the lender’s perspective. Home values are falling and new foreclosure filings are at a record pace. Competing lenders — the ones that made poor decisions — have gone out of business, and you don’t want your company to follow them into oblivion. You don’t want to lend to anyone with less than 10 percent equity. And here’s an application from someone who wants to borrow more than the appraiser says the house is worth.

With people walking away from their houses in droves, and with foreclosure rates rising quickly, would you approve that loan? You wouldn’t, if you wanted to keep your job.

You think the appraiser is wrong? It’s human nature to believe that your house is worth more than a neutral party thinks it’s worth. That doesn’t mean you’re correct, only that you’re human.

The solution to this problem is to put up more cash, if you can. If you’re buying, you’ll have to make a bigger down payment (or talk the seller into dropping the price). If you’re refinancing, you’ll have to pay the difference between the current loan balance and what the refinancing bank is willing to lend.

In the last of the questions above, the homeowner says Wells Fargo will refi the mortgage if he comes up with $25,000. Many would-be refinancers are going to be presented with that ultimatum. And, like that reader, some borrowers will reply with an ultimatum of their own: Refi the loan anyway, or I’ll stop paying and mail in the keys. That action will result in foreclosure, and foreclosure should be a last resort. To walk away from a mortgage in a temper tantrum is self-destructive behavior at its worst.

If you’re pretty sure that you’re going to end up in foreclosure, I strongly suggest consulting an attorney, even if it’s a relatively inexpensive one-hour conversation. The attorney will talk you out of doing anything stupid. Avoid foreclosure if you can.

What are the potential problems with qualifying?

Q: My current rate on my 30-year fixed-rate mortgage (maturity date is 2034) is 5.625 percent. Should I try for lower? Right now I am unemployed, so I assume this could cause a problem.

Holden Lewis: Unemployment definitely is a problem. During the decadent latter days of the mortgage frenzy, about a year ago, a creature dubbed the NINJA crawled out of the muck. That was a loan that didn’t require verification of income, assets or employment. (NINJA stood loosely for no income, no job, no assets. The lender assumed you had those, but didn’t verify whether you, in fact, did.)

Nowadays, almost any loan is going to require verification of income and assets. And the lender definitely wants you to have a job.

Is a down payment necessary?

Q: With the mortgage crisis going on, does a new homebuyer need to have more money for a down payment?

Holden Lewis: Oh, definitely. Nowadays, a lot of borrowers want to see a down payment of at least 10 percent. A year ago, you might have been able to get a subprime, stated-income mortgage with a down payment of 5 percent. Since then, the subprime market has shriveled, stated-income loans are as rare as liberal Republicans and requests for low down payments are regarded warily.

In short, lenders want you to have a job, they want you to be able to document your income, and they want you to have a down payment (for a purchase) or some equity (in a refinance).