Getting/Refinancing a Mortgage in a Brave New World

By Randy

For those of you who may not have noticed, the mortgage market has tightened up and banks that only a few weeks ago were calling you at home during dinner to refinance your mortgage now won’t even return your call. It’s not quite that bad but the mortgage market has changed dramatically and if you are hoping to buy a house or need to refinance your adjustable rate mortgage anytime soon you may have a problem. Let’s take a look at where we really are.

First off, if you don’t need the loan for at least a few months you may be better off waiting. The tightening of the mortgage market appears to be thawing a bit and the Fed has actually begun to lower rates but in general mortgage rates are still much higher than they were a year ago. You should keep refinancing on your radar screen but depending upon your situation, the mortgage lending market may get easier and/or cheaper over the next few months so while we can offer no guarantees, it may be worth the risk to wait if you can.

If you can’t wait then your ability to get a good loan, or any loan at all, depends on your job situation and what kind of loan you need. The good news is that if the mortgage loan you need is less than $417,000, and you have a full time job with verifiable income and great credit, you’ll find loads of banks willing to lend you money. The bad news is that many borrowers can’t meet one or more of those criteria and unfortunately ads you’ll see offering “good” deals on mortgage loans are only good for the “perfect” borrower described above. If you’re not that perfect borrower there are things you can do to make yourself more attractive to mortgage lenders.

Loan size: Loans over $417,000 are known as “jumbo” loans. This rather arbitrary amount is set by the government and dictates which loans can be easily packaged and sold through a governmental agency. This is important because the vast majority of mortgage lenders these days sell the loans they originate. Loans below $417,000 are easily sold and therefore most banks are happy to make them. Loans above that amount are not easily sold and the game is very much harder. It’s possible they may raise this loan size limit soon but don’t hold your breath and if they do increase it the increase is likely to be modest. An obvious solution is to try to keep your mortgage loan below $417,000. As an example, if you have a $500,000 mortgage see if you can find family or friends to lend you $83,000 as a “second” mortgage so your “first” mortgage is only $417,000. If that’s not realistic you can still probably get a jumbo loan but expect to pay an additional ½% to 1% in interest rate just because your loan is bigger than $417,000. If you go the first/second route you can actually afford to pay your nice relative quite a bit higher rate on your second mortgage before you’re equal to the cost of an additional half a percent or so on the larger loan. In the case above you could pay your relative almost 3% interest on the second loan and still be better off than with a jumbo loan that cost an extra ½% in interest. Be careful, your second mortgage should be with a lender who is patient and will have your interests at heart. This is not a time to go see Rocko the friendly lender/loan shark.

Verifiable Income: The world has changed so don’t expect to be able to get a mortgage loan with minimal paperwork and documentation anymore. If you want a shot at a decent loan expect to have to produce tax returns, bank statements, pay stubs and any number of other items that didn’t used to be required. If you’re self employed this can be tricky so assemble whatever you can to show a steady income. Local banks, where you can sit down with a lender to explain your business and show why you are a good borrower may offer the self employed a better opportunity than online brokers. The more documentation of income you can provide the better.

Credit Issues: This is the tough one. If you don’t have good credit I’m afraid you’re probably going to have a problem getting a loan in today’s market. Remember that the problems in the mortgage market largely originated with sub-prime loans, loans made to people with less than perfect credit. If that’s you then right now your best friend is time. You need time to try to improve your credit (pay off credit cards, other loans, etc.) and to let the mortgage market recover from its new found aversion to lending to anyone with less than spotless credit. If you’re hoping to buy a new house be patient, work on improving your credit and try again in 6 or 12 months. If you’re hoping to refinance an existing adjustable rate loan start figuring out how you can make the higher payment when it adjusts. Save more now, get a second job, sell a second car, downgrade your current car…whatever you have to do. The key is to start getting ready several months before the higher rate kicks in; if you wait it may be too late. Unfortunately, the mortgage lending markets, like all financial markets, are not always completely rational and it may take quite a while for lenders to return to more accommodative ways.

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