Dear Michael: I am trying to refinance my home, which has 30% equity. I have tried with two lenders and both of them have said no. This has been a very frustrating experience. Should I give up?
Answer: This is definitely a challenging time for refinancing. The industry’s guidelines to refinance are 45% debt-to-income ratio. This means that your gross monthly overhead personal and household debt cannot exceed 45% of your monthly income. At least 20% minimum equity is also required.
It is difficult to know exactly why you were turned down as the guidelines vary depending on many factors, such as the type of loan and occupancy. The first obstacle you’ll need to overcome is your credit score. In the past, you could have a FICO score in the low 700s and still get a good rate. In today’s overly defensive mortgage lending climate, you’ll need a score of at least 740 for a bank to even look your way and some lenders may require an even higher ranking.
When you apply to refinance your loan you may be asked for every piece of paperwork under the sun. Are you familiar with the blank page on the back of your bank statements that most people throw away? If you don’t provide it with your application, your refinance may be delayed. Mortgage lenders will also want to see every page on every tax return that you’ve filed for the past two to three years, as well as proof of employment and current pay stubs.
Another challenge will be the value of your home. You may think it’s worth a certain amount, but you may not have taken into account the devastating effect of the current mortgage crisis. Sure, your neighbor with a comparable home may have sold his well below what you think yours is worth. But an appraiser may think otherwise because his estimated value will be based on what similar homes – including your neighbor’s – sold for in your area.
Refinance rates are still at historic lows. With a little know-how, the right mortgage broker and a lot of patience, you should be able to take advantage of these rates and overcome the challenges sent your way.
Dear Michael: I am in the middle of a short sale and am now being told that I will have to pay out of pocket for some of the closing cost fees. I thought that the lender who approved the short sale was going to assume all of the closing cost fees?
Answer: The short-sale lender – the one giving approval to short sell and take a loss on what is owed – is going to arrive at a net profit that is agreeable to him/her at the beginning of the escrow period. This is that person’s bottom line. This is the final amount that he/she will take to consider the lien settled even if it is less than what is owed.
You will need to find the best way to work with this amount. The difference between that amount and the sale price is the money left over to pay everything else: the taxes, escrow, commission, title, termite inspection and any credit contracted to the buyer, etc. If there is not enough money to do that, the seller either has to bring the money to the table or the buyer will have to pay out of pocket.
If the deficient amount is not met, the sale will most probably be cancelled unless the short-sale lender approves the additional costs. The only way to generate more money out of the short-sale transaction would be to take the short-selling lender’s bottom line and increase the price of the home to meet the approved amount.
If the market or appraisal does not support this increase, the home cannot be sold without someone else chipping in. Short sales are usually made at a discounted price and this is one of the risks of purchasing a short sale. Many buyers are ready to take the risks associated with short sales in order to get a better price on a home.
Dear Michael: My mortgage is set so that the payments are increasing after five years. I had no idea that this was the type of loan I signed up for. My payments have increased from $1,500 per month to $2,200 per month. I have just lost my job and can’t make the new payment. I can still make the $1,500 payment. I would sell my home but I owe more on it than it is worth. I don’t know what to do.
Answer: The type of loan you are referring to is called an adjustable mortgage. An adjustable mortgage is a mortgage loan in which the interest rate on the note is periodically adjusted after the fixed rate expires. The rate is based on a variety of indices. Consequently, payments made by the borrower may change over time with the changing interest rate (alternatively, the term of the loan may change).
This is not to be confused with the graduated-payment mortgage, which offers changing payment amounts but a fixed interest rate. Other forms of mortgage loans include the interest-only mortgage, the fixed-rate mortgage, the negative-amortization mortgage and the balloon-payment mortgage.
Adjustable rates transfer part of the interest rate risk from the lender to the borrower. They can be used where unpredictable interest rates make fixed-rate loans difficult to obtain. The borrower benefits if the interest rate falls but loses if the interest rate increases.
It is unfortunate that you were not told at the time of the loan that your payments could increase after five years. This type of loan is designated for short-term ownership and is usually geared for a more experienced investor.
You are a good candidate to apply for loan modification because you are showing good faith by making your $1,500 payment. If your wish is to stay in your home, contact your lender and start the process. You will have to submit documents including proof of job loss and bank statement, etc.
Stay persistent. The road ahead is steep and the challenges you face will be challenging. Don’t give up.
Michael Kayem is a Realtor with Re/max/Execs, serving Culver City and the Westside since 2001. Contact him with your questions at (310) 390-3337 or homes@agentmichael.com.
