Is A Home Appraisal Required When Refinancing A Mortgage?

“Is a home appraisal required when refinancing a home mortgage?”

I get that mortgage question every now and then.

Here’s the answer.

“It depends.”

If your current mortgage loan is a FHA mortgage, then you may be eligible for a FHA streamline refinance without an appraisal.

This is beneficial from the standpoint that you can lower your mortgage rate and mortgage payment and not have to deal with the loan to value guideline that you would face if a home appraisal was needed.

Also, you save yourself about $375, which is the rough cost of a new home appraisal.

If you’re in a conventional mortgage and want to refinance into a new mortgage loan, then in all likelihood, a new appraisal is needed.

The way this is determined is that when the mortgage application is initially underwritten by an automated underwriter (which is a mortgage underwriting software), the automated underwriter will do an electronic valuation to get an idea of the home value.

If the automated underwriter determines that there is sufficient equity in the home, then a new home appraisal may be waived.

Mortgage lenders, however, at their discretion, can require a home appraisal despite an electronic appraisal waiver.

The home apprisal is critical in the transaction as it verifies the current home value and condition of the home, which is the mortgage lender’s collateral.

In conclusion, when refinancing a convenional mortgage, a home appraisal will – in all liklihood – be required.

Sometimes, you may be given an appraisal waiver if it’s determined by the automated underwriter that there is a lot of equity in the home.

Also, if you currently have a FHA mortgage, you may be eligible for a FHA streamline refinance without an appraisal.

Can You Get A Mortgage With Bad Credit?

“Can I get a mortgage with bad credit?”

I get this mortgage question from time to time and the answer is: “It depends on how bad the credit.”

(Sorry for the non-direct answer but very little is “black and white” in the mortgage world these days.)

If your credit scores are below 620, you’re going to have a hard time getting a mortgage, or should I say conventional mortgage.

A conventional mortgage is also known as an “Agency Loan,” or a mortgage that is sold to Fannie Mae or Freddie Mac.

(By the way, getting a co-signer with credit won’t help.)

Those institutions have underwriting guidelines that the mortgage lenders have to follow.

One of the guidelines says that if the middle credit score is below 620, the loan isn’t “saleable” to Fannie Mae or Freddie Mac.

This means you’re not going to get the mortgage with a credit score below 620.

The subprime mortgage days are over so this isn’t an option.

However, there are 2 alternatives for people with bad credit who want to get a mortgage.

The first is to work to improve the credit scores so you can get a conventional mortgage.  This may take some time – it just depends on why the credit is bad.

The second is to find a “private” lender who doesn’t look at credit when they underwrite the mortgage application.

These mortgage lenders are called “hard money” lenders and despite your bad credit, they will loan you the money at a high mortgage interest rate.

In addition, they require a good amount of equity in the property, usually no less that 40%.

The good news is if your credit scores are just mediocre – say between 620 and 660 – you can get a mortgage.

However, there will need to be “compensating factors” such as low debt to income ratios and/or a relatively low loan to value ratio, usually 80% or less.

Another compensating factor is to have a good amount of cash assets saved – at least 6 months of mortgage payments.

In conclusion, you can get get a mortgage with bad credit – it will just have to be from a hard money lender and it’s going to cost you a high mortgage rate and lots of money down.

Can A Co-Signer With Good Credit Help You Qualify For A Mortgage?

Some people I talk to who want to take advantage of the low mortgage rates have mediocre or below-average credit scores.

Naturally, they’re inquiring about lowering their current mortgage rate or lowering their monthly mortgage payment or even taking their mortgage term down from a 30 year fixed to a 15 year fixed mortgage.

All this makes sense.

The problem some of them encounter is that with below-average credit scores, they’re unable to qualify for a mortgage.

By the way, when I say below-average credit scores, I mean credit scores below 620.

So the next question they’ll ask is “What if I get a co-signer who has really good credit scores to help me qualify for a mortgage?”

Here’s the answer.

A co-signer with good credit scores won’t help you qualify for a mortgage because the mortgage lender looks at the low middle credit score and uses that as the representative credit score when they qualify you.

What that means is that if your middle credit score is 600 and your co-signer’s middle credit score is 800 (which is excellent), mortgage lenders are going to use the lower mid score – or the 600 in this example.

Remember everyone has 3 credit scores, each generated by the 3 credit bureaus: Equifax, Experian, and Trans Union.

This borrower has 1 option.

It is  to figure out why the credit scores are low and take steps to repair the credit.

Once the mid credit score is above 620, they can qualify from a credit standpoint and see if they’ll qualify for a mortgage based on the other mortgage underwriting criteria: debt to income ratios and loan to value ratio.

In conclusion, adding a co-signer with good credit won’t help you get a mortgage loan if your credit scores are “outside the mortgage lender credit score guidelines” as the mortgage lender will use the low middle credit score – no matter what the co-signer’s credit score – when qualifying you for a mortgage loan.

Can You Get A Mortgage After You've Had A Bankruptcy?

With the overwhelming number of bankruptcy filings out there many people wonder whether they will ever be able to get a mortgage loan to buy a new home or refinance their existing mortgage loan.

Many people ask me: “I’ve had a bankruptcy, can I get a mortgage loan again?”

Or, “How long do I have to wait before I can get a mortgage loan after my bankruptcy?”

First, you are able to get conventional mortgage financing after you’ve had a bankruptcy.

You just have to wait some time.  It’s called “bankruptcy seasoning.”

Here’s what it means.

If you’ve had a Chapter 7 bankruptcy, then you have to wait at least 2 years from the bankruptcy discharge date to apply for a FHA mortgage loan.

For a conventional mortgage loan, you have to wait 4 years after the bankruptcy discharge date.

If you’ve had a Chapter 13 bankruptcy, then you have to wait 1 year from the bankruptcy discharge date to be eligible for a FHA mortgage loan.

For a conventional mortgage loan, you have to wait 2 years.

Just remember that you want to reestablish good credit after the bankruptcy discharge.

Also, after the bankruptcy discharge, in addition to reestablishing credit, concentrate on maintaining good credit by paying the bills on time and keep the credit card balances low or at zero.

If there are credit issues after the bankruptcy discharge date, your credit scores will suffer and you’ll be less likely to qualify for either a conventional or FHA mortgage loan.

So don’t despair, waiting 2 years after a Chapter 7 bankruptcy  or 1 year after a Chapter 13 bankruptcy isn’t a lot of time.

You will be able to get mortgage financing again!

Are Mortgage Rates Higher When The Closing Costs Are Included In The Mortgage Amount?

This mortgage question I get a lot and it specifically relates to a home loan refinance transaction.

Many homeowners will ask me whether they can include their closing costs in the loan amount when refinancing their mortgage loan.

The short answer to that home loan question is “yes” – as long as there is enough equity and the mortgage loan amount doesn’t exceed mortgage loan to value underwriting guidelines – mortgage closing costs can be included in the mortgage loan amount.

Now, is the mortgage rate higher if the closing costs are financed?

The answer is “no, the mortgage rate isn’t higher” although there is a condition.

If the refinance transaction is a “cash out refinance,” which means the homeowner is taking additional cash out of their home for whatever reason – debt consolidation, home renovation, college tuition, etc. – mortgage closing costs can be financed and there will be no increase in the mortgage rate.

If the homeowner isn’t taking cash out of their home but is simply taking on a new mortgage loan to lower the mortgage rate, lower the mortgage payment or change the mortgage type or mortgage term, then they can include the closing costs in the loan amount.

This transaction type is called a “rate and term refinance,” also known as a “no cash out refinance.”

Now, here’s the caveat.

When doing a rate and term refinance, the homeowner can finance the closing costs and there is no change to the mortgage rate.

However, if the homeowner ends up taking 1% or $2000, whichever is less, over and above financing the closing costs, the mortgage transaction type changes to a cash out refinance and the mortgage rate can increase.

For example, if the mortgage loan amount is $100,000, on a no cash out refinance, the homeowner can finance their closing costs and can get back an additional $1000 – which is 1% and is less than $2000 – and can still maintain the same mortgage rate.

However, if the “cash to borrower” exceeds $1000, the transaction type changes to a “cash out refinance”, and the mortgage rate may increase.

So make sure if you’re including your closing costs in the mortgage loan amount and you’re doing a rate and term or no cash out refinance that the cash back to you at closing doesn’t exceed 1% or $2000, whichever is less.

Otherwise, prior to closing on the mortgage refinance, your mortgage loan officer may tell you that the mortgage rate may have to increase because the mortgage transaction type changed.

If this were to happen, however, the easy fix would be to lower the mortgage loan amount so the cash back to you doesn’t exceed the 1% or $2000 rule.

Why Is It So Hard To Get A Mortgage For A Manufactured Home?

I get a ton of calls from homeowners asking: “Do you do mortgages for manufactured homes?”  Seriously, I probably get 5 calls a day with that question.

First, what is a manufactured home?

A manufactured home, in contrast to a modular home, is pre assembled at a factory and shipped to the lot where it will sit.

A modular home is also assembled at a factory; however, it is shipped in segments and fully assembled at the site or property location.

Here’s why it’s so difficult to get a mortgage for a manufactured home.

It’s so difficult to get a conventional mortgage because the manufactured home is viewed by the mortgage investor as poor collateral.

Remember, in the mortgage world, collateral is one of the key parts in the home loan transaction.

The reason the manufactured home is seen as poor collateral is because it may not be secured to the concrete slab it sits on and the home can be moved.  That’s a big deal.

Also, the land that the manufactured home sits on may be rented.

If the land is rented, when the lease expires, the landlord may want to do something else with the land, in which case the homeowner would have to move the manufactured home or leave it.

Some manufactured homes that are anchored to the ground aren’t anchored securly enough and can be moved.

During hurricanes to we see a larger percentage of damage to manufactured homes.  This may have something to do with the quality of the home construction.

Also, in comparion to stick built or masonry single family homes, a greater percentage of homeowners with manufactured homes end up defaulting on the mortgage.

In conclusion, getting a mortgage for a manufactured home is difficult because:

1. the land the manufactured home sits on may be leased

2. the manufactured home can be moved

3. even if the land is owned and the manufactured home is anchored, the home can be moved

4. the mortgage default rate for manufactured homes is higher than average

Why Is The Home Loan Process So Difficult?

Is there such a thing a the perfect mortgage loan application?

I hear from borrowers all the time that they are being “nitpicked” by mortgage underwriters for additional paperwork.

Borrowers will say to me “what I supplied should be enough.”

It doesn’t work that way in the mortgage world anymore.

The reason is because if the mortgages loan applications don’t conform with Fannie Mae or Freddie Mac underwriting guidelines, the originating mortgage lender has to buy the loan back.

For example, if a mortgage loan application is cleared, closed, and funded and subsequently is found to not meet a Fannie Mae or Freddie Mac guideline, the mortgage loan has to be bought back by the originating mortgage lender.

A $300,000 mortgage loan, for example, can put a small mortgage lender out of business as they may not be in a position to write a check for $300,000.

That’s why mortgage underwriters are so nitpicky.

The mortgage ”prequalification” process begins when the home loan is originated.

The borrower will talk to the loan officer or mortgage broker who understands what’s needed to get prequalified for the home loan.

The loan officer requests and gathers the required paperwork from the borrower.

Once the paperwork is collected, the mortgage loan application is forwarded to a mortgage underwriter.

The mortgage underwriter will make sure that the mortgage loan application file has all the required and necessary paperwork needed so the mortgage loan can be sold to Fannie Mae or Freddie Mac.

So if Fannie Mae wants all pages to a bank statement and the borrower only supplies the summary page, the mortgage underwriter will ask for all pages again.

Even though to a borrower that may not make sense or seem silly, all pages are required in order to make the mortgage loan “saleable.”

In conclusion, as a borrower who wants to either refinance into a lower mortgage rate or shorter term mortgage or if you’re buying a new home and in need of mortgage financing, know that mortgage underwriters are only doing what’s required to make the mortgage loan acceptable and “saleable” to Fannie Mae or Freddie Mac.

The bottom line: even if the mortgage underwriter asks for something you feel isn’t necessary or relevant, give it to them.

Will HARP 2.0 Help You?

The HARP program, which stands for Home Affordability Refinance Program, is aimed at helping homeowners who owe more than their home is worth to refinance their existing mortgage loan into a lower mortgage rate and lower mortgage payment.

HARP falls under the U.S government’s “Making Home Affordable” program and was instituted to help stabilize the U.S. housing market.

HARP 2.0, which is different from the original HARP, has wider, more flexible criteria for eligibilty.

Here’s the main criteria to be eligible for HARP 2.0:

1. Your existing mortgage has to be owned or guaranteed by Fannie Mae or Freddie Mac.

To see if your mortgage is owned by Fannie Mae, go to the Fannie Mae loan lookup page and enter your address.  It’ll tell you whether Fannie Mae owns your exisitng mortgage loan.  To see whether Freddie Mac owns your mortgage loan, go to the Freddie Mac loan lookup page.

2. Your existing loan to value ratio cannot be below 80%.  HARP can save you money this way.

For example, you don’t owe more than your home is worth but your current loan to value ratio is 95%.  This means that you would have to pay private mortgage insurance PMI, which would increase your monthly mortgage payment.

Under HARP 2.0, you don’t have to pay the PMI, even if the loan to value ratio is over 80%.

3. At the time you apply, you have to be current on your mortgage loan.  You can have one 30 day late mortgage payment within the last 12 months but no mortgage late payments within the past 6 months.

4. Specific income and credit requirements don’t apply as long as your monthly mortgage payment doesn’t increase more than 20%.  However, the mortgage lender, at their discretion, will determine whether you’re an acceptable risk.

5. Second homes and non-owner occupied homes (i..e rental properties) are now allowed under HARP 2.0.

6.  The existing mortgage loan has to have been originated before May 31, 2009.

Those are some of the benefits of HARP 2.0.

You want to remember that the individual lenders can add “overlays” to those requirements, making it tougher to qualify.

An overlay is an additional mortgage underwriting requirement.

For example, in theory, there is no minimum credit score to be HARP 2.0 eligible; however, most – if not all – mortgage lenders require a minimum credit score of 620 to qualify.

Even if you’re unsure whether you’ll qualify, HARP 2.0 is still worth looking into as it can help lower your current mortgage rate and mortgage payment!

Are Mortgage Rates Dropping Again?

I recently was asked by Rob Chrisman, who writes well known mortgage blog, what trends I’ve seen lately in the mortgage marketplace.

After thinking about the question, the short term trend that I saw was that mortgage rates were dropping again!

Since last Friday’s jobs report, which showed fewer jobs added to the U.S. economy than expected, mortgage rates have dropped.

Last Friday, we saw the beginning of the “new” mortgage rate drop.  The trend continued on Monday and Tuesday, seeing mortgage pricing improve substantially.

What I mean is that if you were floating your mortgage rate on Friday and waited to Tuesday to lock the mortgage rate in, not only did we see a mortgage rate decline by about a .25% but also the cost of the mortgage rate went down.

Wednesday, we gave back some of those gains but Thursday and today - Friday, April 13th - we saw mortgage rates continue to drop and mortgage pricing improve.

The bottom line is that if you’re floating your mortgage rate, you may want to consider locking the interest rate in.

I’m not sure where the mortgage rate “bottom” is; however, I would never have predicted that people would be refinancing out of 4.375% 30 year fixed mortgages into 30 year fixed mortgages with lower interest rates and nominal closing costs.

It’s incredible, when you think about it.

So, if you have a mortgage application in process and you’re  ”sitting on the fence” regarding your interest rate lock, my suggestion is to determine if there is benefit now in refinancing.

If there is, do it - don’t wait for the interest rate to drop .125% or save $40/month (for example) – the risk or cost to you isn’t isn’t worth it!

Does It Make Sense To Refinance To A 15 Year Fixed Mortgage?

I was speaking to a friend of mine this morning and he asked me if I could figure out whether it made sense for him to refinance his current mortgage loan into a 15 year fixed mortgage at 2.875%.

Here are the home loan particulars:

His original mortgage loan is a 30 year fixed mortgage at $401,000 and he has paid into it for 4 years.

He’s wants to have it paid off in 12 years and wants to know how much he’ll have to prepay to accomplish that.

His current principal and interest payment is $2214/month.

Using a biweekly payment calculator, if he applied $350 every 2 weeks to mortgage principal reduction, his current mortgage loan would pay off in 12 more years, which is what he wants.

His new principal and interest mortgage payment with the additional money applied to mortgage principal reduction increases to $2972 month.  350 x 26/12 = $758.

By doing this, his net effective interest rate would drop to 2.62%.

The total cost of his loan (excluding the closing costs he paid when he bought the home) would be $598,740.

The total interest paid would be $197,740.

Does it make sense for him to do this or does it make more sense for him to refinance the 5.25% existing mortgage into a 15 year fixed mortgage at 2.875%?

His current home loan balance is $380,000.

At a mortgage rate of 2.875%, his new principal and interest payment would be $2601 per month.

His APR would be 2.98%

The total cost of the loan would be $468,256.  His estimated mortgage closing costs at this mortgage rate are roughly $5,460.

The total interest paid is $88,256.

Ok, so what should he do?

From a monthly cash flow standpoint, by prepaying and staying the course his mortgage payment is $2972 a month.

On a new 15 year fixed mortgage at 2.875%, his principal and interest payment is $2601 a month.

So he’s saving $371 a month.  If he saved that over a 12 year period without earning any interest, that amounts to $53,424.

If he stays the course, the total cost of his existing mortgage with the additional mortgage prepayments would be $598,740.

On a new 15 year fixed home loan at 2.875% the total cost amounts to $468,256.

The difference in total cost savings is $130,484.  Let’s subtract the $5,460 in closing costs from that figure to get a net savings of $125,024.

One thing we want to remember is that if he stays the course and prepays the mortgage, his loan will pay off in 12 years, 3 years short of the 15 year fixed mortgage term.

So, on the 15 year fixed mortgage, he’ll be making 36 more mortgage payments at $2601 which amounts to $93,636.

In summary, my friend will save more money by refinancing into a new 15 year fixed mortgage at 2.875%

He’s saving $125,024 in total costs.  We want to back out the $93,636 in additional payments made on the back end of the mortgage loan, bring the figure down to $31,388.

Finally we want to add the $53,424 in savings he would gain by reducing his monthly mortgage payment.

That brings the net savings to my friend at $84,812!

That amount of savings justifies refinancing into a 15 year fixed mortgage loan at 2.875%.

Don’t you agree?