You’ve built up equity, your credit score is through the roof, and interest rates are lower than ever. Refinancing your home mortgage should be a no-brainer. But even if you’ve cruised through the home refinance process before, be prepared: It’s a whole new world out there for borrowers, and there could be rough seas ahead.
I found this out first-hand when I initiated the third refinance of my existing home loan. This time around, our mortgage broker—the same one we used the last time, back in 2008—started the process with what he sternly framed as his now-standard conversation.
“Do not change bank accounts. Do not change jobs. Do not apply for credit—be it credit cards, or loans for furniture or vehicles,” he warned.
The advice was not wrapped up with a pretty bow, and it wasn’t delivered with our broker’s customary smile.
I’ll cut to the chase: I got my loan. But it came complete with odd, unexpected hurdles that struck me as both random and petty. And I have a pretty good idea of where to place the blame.
How did we get here?
At the turn of the 21st century, obtaining a home loan was easy—too easy. Income and asset reviews were superficially evaluated, credit histories were an afterthought, and sketchy credit scores could be swept to the side. Interest rates crept down, down, down, and loans were handed out like cheap Halloween candy.
The result was no treat: The economy became flooded with toxic loans, and by 2010, there were more than 1 million home repossessions on top of 2.9 million foreclosures.
Since the subprime mortgage crisis, standards for underwriting have been tightened considerably, and it was my assumption that it's because the government had put stringent new rules in place. Turns out, I was wrong.
“That’s a myth,” said Casey Fleming, a Silicon Valley-based mortgage advisor and author of The Loan Guide: How to Get the Best Possible Mortgage. “The underwriting guidelines didn’t change much. What has paralyzed the mortgage industry is political pressure on Fannie Mae and Freddie Mac to not make any mistakes.”
That political pressure, in turn, has trickled down to underwriters, who are forced to buy back any loans that Fannie and Freddie don’t approve—after the fact. And since Fannie and Freddie have been funding the vast majority of loans in recent years (and gotten increasingly picky in which loans they'll approve), lenders' hands are tied.
Today, more work is required from homeowners applying for loans, even if they have solid credit. Although interest rates are at historic lows, the road to a successful refinancing is fraught with speed bumps and U-turns. Here’s how to make sure you aren't headed down a dead-end street.
Preparing for an appraisal
If you’ve lived in your home for a few years, some of its defects and deferred maintenance issues have probably started to fade into the background—for you, at least. But you'll find that in 2014, the home appraisal inspection process is sure to bring them all back to the forefront.
Ask your mortgage broker to provide a checklist of some of the more common issues highlighted by appraisers in your area. While mortgage brokers aren’t trained appraisers, they should be able to provide an overview of what to expect.
An appraiser is not out to verify that you keep a tidy house or that you mow the lawn every weekend; they’re not going to make a big deal about weeds, laundry on the sofa, or a stain on the carpet. Don’t focus on major repairs—they may or may not be required by the appraiser—but do tackle the smaller fixes.
You’d think there would be a cheat sheet that would help homeowners prepare for an appraisal. And in fact, there was: The U.S. Department of Housing and Urban Development (HUD) used to publish a reference document, but it's currently “in the process of reviewing and consolidating the guide.”
Remember: It matters where you live.
State and local regulations are often more stringent than those provided by the federal government. For instance, California residents are bound by certain laws regarding earthquake safety. One of them—that water heaters must be braced, anchored, or strapped—has been in effect since 1989, but was only loosely enforced for much of the intervening quarter-century. Not so today.
Regulations regarding fire and carbon monoxide detectors vary from state to state, as do flood, hurricane, tornado, and fire safety guidelines. Homes in rural areas may also be subject to well or septic reports. If an appraiser sees evidence of flooding—like a watermark on stucco—you should get ready for a mold inspection or remediation.
Plumbing and heating should be kept in good working order, and well-maintained HVAC systems are key in some states. You don't want your appraiser seeing broken windows—even peeling paint can be an issue.
“I had an appraisal where chipped paint was found,” said Jeremy Schachter, Phoenix-based mortgage advisor with Pinnacle Capital. “The home was built before 1978, so the underwriter asked for paint to be tested for lead, saying it was a safety issue.” In the end, the homeowner had to get the paint tested—a $200 expense—and the refinance was delayed.
“They’ll want your first-born and a blood sample,” said Schachter. “Even with perfect credit and lots of equity, underwriters will come back with something, and then something else.”
Remember: Lenders have their own priorities.
The bottom line is, if the homeowner defaults, the lender doesn’t want to be stuck with a property that will require additional investments—especially if real estate values go into a 2008-style nosedive.
If you’re refinancing with the goal of taking money out for home improvements, the lender will want to get the best bang for the buck, boosting the value of the house. You may be planning to repaint, but the lender might have other ideas. The bank could feel updated appliances or a new roof would be a better investment for the property.
It's also worth noting that underwriters are fussier with documented square footage than they once were. Unpermitted extensions—like a garage that was converted to a bedroom—can be a serious problem. That's because discrepancies could cause the bank headaches down the road.
The good news is, if you're not planning to take money out for improvements, refinancing at today’s low rates could bring you significant savings over the course of your loan—possibly in the tens of thousands of dollars.
Fleming says that, in some ways, the refinancing process has actually become simpler. That's because there are fewer loan products available, meaning the borrower has less to evaluate. “If I had one piece of advice, it would be to ask your mortgage advisor why they’re recommending a particular product,” he suggested.
And there's even better news for borrowers: Refinancing a home loan may soon become a little easier.
“Lenders are dying,” said Fleming. “They’re desperate to make more loans.”
The reason is simple: Up until just a couple months ago, Fannie and Freddie were underwriting virtually all loans, but now private money is starting to trickle into the marketplace and creating competition. “There’s no political pressure on Real Estate Investment Trusts to adhere to any specific guidelines," he continued, "so their underwriting will be more lax.”
Still, loans funded by REITs could be more expensive than those coming from Fannie and Freddie. “If you hold off for looser underwriting guidelines, you may pay more; if you’re qualified, you’re probably better off refinancing today,” added Fleming.