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Mortgage Blog

Nov 10

Refinance Rejection: Can Anything Be Done?

"My application to refinance my $200,000 loan was recently turned down...do I have any recourse?"

If by recourse, you mean a third party of some standing who will direct the lender to make the loan, or attempt to persuade them to do it, the answer is "no".

No third party is going to re-underwrite the loan to see if the lender made a mistake. Such mistakes are very rare because lenders only make money on loans they close; they lose money on loans they reject.

Re-applying With Another Lender

It is possible but unlikely that another lender would approve your loan. Virtually all $200,000 loans are either sold to Fannie Mae or Freddie Mac, and therefore subject to the underwriting rules of those agencies; or insured by FHA and subject to its underwriting rules. Some lenders place "overlays" on top of these rules which are more restrictive than those of the agencies. It is possible that your loan met agency requirements but was tripped up by a more restrictive overlay, which would mean that another lender might approve it. Before I applied elsewhere, however, I would discuss your rejection with the loan officer who gave you the bad news to see where your application fell short, and whether it might have met agency requirements.

On the assumption that you did not meet agency requirements, your only option is to change the transaction in a way that will bring it into compliance. The changes required depend on the reason or reasons you were rejected.

Credit Score Too Low

In general, it takes considerable time to raise a credit score significantly, but there are some exceptions. One is where the score is depressed by a reporting mistake, which is not uncommon. As soon as the mistake is corrected, your score will jump. Another possible way to juice your credit score is to pay down high balances on your credit cards. A high ratio of balance to maximum balance, called the "utilization ratio," is considered a sign of weakness and potential trouble, reducing your score. Paying down balances to less than 50% of the maximums should raise your score.

Finally, you can detach yourself from the "wrong vendors". Because finance companies lend to relatively poor risks, the credit score of any borrower owing money to a finance company is lower than it would be if the creditor was a bank. By the same logic, borrowers who have credit cards of department stores are penalized, relative to what their score would be if they had cards issued by banks. If you can't pay them off, place department store cards at the top of your balance-reduction list.

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Nov 4

Mortgage Payoff In a Refinance

A reader asked her loan officer for an explanation of the process by which her existing loan was paid off when she refinanced. The note shown below is the loan officer's written response. In contrast to my usual practice, I haven't edited it in any way.

"Basically, the way mortgage companies do payoffs is we take your payoff amount off your credit report + one month of payment. The reason we do that is because when you make your upcoming October payment, you are paying principle for October, but your paying Septembers interest. So when you close this loan say in November you still have to account for that monthly interest payment you missed. So that's why we roll in the whole loan amount, then at closing we net out the principle and escrow portion of it and just make it the interest only. That's why your payoff is showing up higher than the 219K. But the way that is combated is you will skip one month of payments all together. So say you close in November, you will skip December all together then start in January."

The reader found this answer completely incomprehensible, as I did, and immediately suspected that the loan officer was trying to "pad his profit." The loan officer's incoherence induced the suspicious borrower to look elsewhere.

There are many problem areas in the mortgage process that can result in a borrower overpaying, making a poor selection decision, or both – but the payoff process associated with refinances is not one of them. That's why I have never written about it before. But some borrowers do have anxiety about the process because they don't understand how it works and fear that it could be one more place where they can be ripped off. For the most part, this is not a danger, but the process has a few features that can cost borrowers money if they don't understand it.

When you apply for a refinance, one of the documents the new lender will require you to sign authorizes them to request a payoff statement from your existing lender. This is the case even if you are refinancing with the same lender. The new lender should give you a copy of the statement when they get it. If the loan officer quoted above had simply provided the statement, he could have avoided arousing the borrower's suspicions by spouting gobbledygook.

While no two payoff forms are exactly alike, they all provide the same basic information. The bottom line is the total amount the borrower has to pay the  lender on a specific payoff date to eliminate the borrower's debt. Assuming the payoff date is October 7, and that the borrower has not yet made the payment due on October 1, the payoff amount consists of the following:

The loan balance as of the end of September:

Plus interest for the month of September (which would have been in the payment due Oct 1):

Plus interest for the first 6 days of October:

Minus current escrow balance:

Plus payoff fees:

Plus other unpaid debts:

If the borrower had made the mortgage payment due October 1, the loan balance would be reduced by the amount of the payment that constituted principal, and the only interest due would be for the first 6 days of October.

The daily interest covers the period until the payoff date, except on FHA mortgages, where the payment covers the entire month. Evidently FHA's accounting system can't deal with days, only months. That means that it is a good idea for borrowers refinancing out of an FHA to close as close to the end of the month as possible.

Not all lenders deduct the escrow balance from the payoff amount, and there is no requirement that they do so. In such cases, the borrower will receive a check some weeks later. That is a deplorable practice because during that period the borrower is in effect maintaining two escrow accounts. This is important for the borrower to know about.

The payoff fee will be called different things by different lenders, and there could be two of them, but the amounts are small -- on the order of $50 or so.

Any unpaid debts due the lender will also appear on the payoff statement. The most common are late charges, which in some states are difficult for lenders to collect if the borrower refuses to pay them.  They can't refuse at payoff if they want the refinance to go through.

 

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Oct 14

Jump-Starting the Home Market - Some Specific Proposals

The last post argued that a roll-back of Fannie/Freddie lending terms to where they were before the financial crisis was needed to prevent a second round of home price declines. In addition to benefiting homeowners and the economy, this would reduce Fannie/Freddie losses on both old and new loans, which makes it a requirement of responsible conservatorship.

This entry and the one that follows will discuss a few of the many specific changes in underwriting rules that are needed.

Modify Rigid Affordability Rules

The post-crisis rule that every mortgage loan must be affordable to the borrower was a knee-jerk reaction to the excesses of the bubble period, when many adjustable rate loans to sub-prime borrowers were not affordable past the initial rate period -- usually 2 years. The blanket affordability requirement that emerged is preventing loans from being made that are safe to the lender and useful to a borrower who can't meet affordability tests.

Mortgage loans are distinguished from all other loans by their collateral, and for a long period in our history, lenders based their decisions only on the collateral value. Incorporating credit and income affordability into the decision process was an advance, but making affordability an absolute requirement was a step backwards.

As previously mentioned, there are many different situations where low-rate, adjustable loans are in the interest of borrowers facing temporary problems. If the property value is sufficient, there is every reason such loans should be made.

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Oct 7

Jump-Starting the Home Market -- and the Economy

Policy proposals for dealing with our current depressed economy are largely at an impasse. Monetary policy has gone about as far as it can go while fiscal policy is hamstrung by political constraints on any measures that enlarge the Federal debt. Housing policy, in contrast, has enormous expansionary potential that can be released merely by revising or eliminating some of the many unproductive rules governing how home loans are granted.

These rules originate from Fannie Mae, Freddie Mac and in some cases from FHA. In combination, these agencies touch about 95% of all home loans being written today. Most of the rules apply to who is and who is not qualified to borrow, and among those qualified, to how much extra they have to pay for deviations from pristine status. The liberalized rule changes would reduce expected losses to the agencies because the additional housing demand that resulted from them would stabilize home prices.

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Jun 30

Now may be a GREAT time to shop around for Homeowners Insurance

Home prices have declined -- in some markets as much as half what a property might have sold for before the housing downturn. So why hasn't your homeowners policy changed as well?

Insurance experts are quick to point out that insurance is not based on the market value of property, but on the cost of rebuilding the property after it is destroyed. That cost includes not only labor and materials to rebuild, but also the cost of demolition and the removal and disposal of things that can't be reused.

"Market values are decreasing, but the cost to replace has gone up," says Elaine Baisden, vice president of national property for Travelers Insurance.

That said, homeowners insurance might not have to be as pricey as your insurance agent would like it to be. Consider these homeowners insurance basics, as well as some ways to trim its cost.

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