Hakan Tale (R), listens to Joseph Sant, a lawyer at Staten Island Legal Services, as Sant explains the latest round of paper work from Chase Bank regarding a denied loan modification application for Tale's mortgage, in Staten Island, New York, December 9, 2011.
Credit: Reuters/Andrew BurtonNEW YORK | Sat Oct 13, 2012 9:00am EDT
NEW YORK (Reuters) - The TV and radio ads make it all seem so easy. Walk into a lender's office, refinance your home loan at a rock-bottom rate, and walk out with a lower monthly payment.
Here's a little tip: It's not so easy.
If you know the pitfalls, you can at least prepare for them - and perhaps chart a wiser course. A few issues that could have your application earmarked for the ‘Rejected' pile:
1. Heightened credit score demands
If you're refinancing, that means you've successfully secured a home loan already. But since then, lenders have started to demand near-pristine credit scores. "Now to get access to the lowest rates, you need a FICO score above 740," says Keith Gumbinger, VP of mortgage information site HSH.com.
Not quite the perfect score of 850, but still quite challenging to achieve. Credit scorer FICO does not break out the average number for refi applicants, but the national average is 690 -- well below what will get you prime lending rates.
2. Low appraisal
While interest rates have gone down, so have U.S. home values. The average home value dropped a third from the start of 2007 to the start of 2012, according to housing analytics firm Fiserv. For refinancing, that's a problem.
Chicago's Jesse Raub and his wife have owned a home for about three years, and recently started the refi process. But then the appraisal came in low.
"Beware that the appraised value of your home may not be what you think it should be," says Raub, 27, who's a trainer and educator for Intelligentsia Coffee. "Our new mortgage amount was close to the total value of the home - which required us to get mortgage insurance as well."
3. A home equity line of credit
You may have forgotten that you once took out a home equity line of credit. You may have not even touched a penny of it. But it could still derail a refi, because it means another lender has a claim on the value of the home.
"If you're refinancing your first mortgage, the lender of the home-equity line has to agree to that," says Mike Fratantoni, vice president of research for the Washington, D.C.-based Mortgage Bankers Association.
Essentially, that lender needs to sign off on being second in line, and agree that the primary mortgage will always be paid off first (in the event of a foreclosure, for instance). "There may be fees associated with that, and so a home-equity line of credit is one more thing that could make a refi more difficult."
4. Condo or co-op troubles
If lenders are going to fork over hundreds of thousands of dollars, they don't want any issues to make them nervous. And when the property is subject to decisions of an unpredictable board of directors, that can make them nervous.
"Any number of issues might trip you up," says Gumbinger. "If the building finances aren't in good shape, or if the insurance isn't paid up, or if there are any units in foreclosure, or if there are any lawsuits against the condo association, or if the building is comprised largely of renters. All kinds of fun stuff can arise."
5. Timeliness requirements
Banks want to see the most up-to-date financial information possible before they sign off on a mortgage. But they also have a tendency to ask for document after document after document regarding your financial situation. If the refi process has ballooned to 60 or even 90 days, but they require documents from the last 30 days, that could put you on a carousel of paperwork straight from the ninth circle of hell.
So get out your yoga mat, breathe deeply, and have a mantra ready. You're going to need lots of patience. "Expect the worst," advises Erin Lantz, director of the mortgage marketplace for real estate site Zillow.com. "If you come to terms with that at the beginning, it will remove the stress later on."
(Follow us @ReutersMoney or here Editing by Beth Pinsker Gladstone)
