Refinance: Playing by Tighter Loan Rules
Lavia says he makes more than $100,000 per year and has $100,000 in liquid assets. His home is worth $800,000, and he's looking to refinance $420,000. His FICO score is almost 800 and he hasn't missed any payments in seven years. If he got a refi at today's rate his payment would go down by $200 per month, putting him in even a better financial position.
In the past he would have been a prime candidate for a refinance, yet because he's self-employed he's been rejected after applying to two different banks for a refinance. "The days of getting a little help from a broker/lender as someone else 'in the biz' of real estate are no more," Lavia said.
The big problem for self-employed folks is that their finances are hard to pin down and stated income loans are no longer an option. "Ironically, the most qualified people are the hardest to qualify because their finances are often very complex," mortgage broker Todd Huettner, who has spent 18 years in the finance and real estate industry, told HousingWatch.
"Compounding this problem is lenders face intense scrutiny from both
Huettner sometimes recommends to clients that they consider not taking legal deductions one year so that they can show higher income and get a refinance. If the savings over the life of the mortgage is worth more to the client than the loss of some deductions for one year, that might make a lot of sense. But, he cautioned, "make sure you're working with someone who knows what they're doing." Applying for a refinance if you're self-employed requires a lot of groundwork before you even put in the application.
Huettner says that banks look at everyone as liars, who are "all guilty until proven innocent." It's even more important to find an experienced mortgage broker who knows the underwriting rules and can go to bat for you when the underwriter asks for information that is not required.
Now that stated income loans are no longer available, self-employed people must show two years of tax returns. Their income must show an increase from one year to the next. If the two years of tax returns show declining income then the applicant is likely to be denied, Rick Hogle of Supreme Lending explained. He too recommended that self-employed people take less tax deductions if they need to show higher income to get a refinance, but he said that it's "difficult to think about your mortgage when you do your income taxes."
The self-employed are not the only ones who are facing rejection from the banks. Eric Kandell of Flagship Financial said even veterans who qualify for streamlined VA loans are facing greater scrutiny.
According to VA rules, if a vet will save money with a refi by lowering the interest rate, the process should be streamlined and the bank is not required to do an appraisal or income check as long as the vet has been making his mortgage payments on time. But Kandell said banks have changed the rules and are requiring appraisals and income checks before allowing a refinance for VA loans.
In today's market, unless you have at least 80 percent loan-to-value, you can't get a refinance, which for some people means that they have to bring cash to the table in order to get a refinance. If you're in that position, Hogle recommends that you consider an FHA refinance, which you can get for 97.75 percent loan-to-value.
In today's market Hogle said the keys to qualification include:
- Making all mortgage payments on time
- Making sure you pay all other bills on time
- Keeping your credit balances low
- Increasing your equity position in your home.
Those all sound like reasonable steps that anyone should take, but yet you do hear stories of people taking these steps and still getting denied a refinance. If you do, don't give up. Just find someone who knows how to get you through the process.
Lita Epstein has written more than 25 books including "Reading Financial Reports for Dummies" and "The 250 Questions You Should Ask About Buying Foreclosures."
For more insight on mortgages and refinancing see these AOL Real Estateguides:
- Mortgage Jargon in Simple Terms
- Refinancing Do's and Don'ts
- Time to Refinance? 4 Questions to Ask
- Four Ways to Benefit From a Cash-In Refinance
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