With home mortgage interest rates at historic lows, this might be a great time to refinance your home mortgage. However, unlike several years ago when the loan-to-value ratios were lower and banks loaned to anyone who asked, today’s standards are much more restrictive. So restrictive in fact, that our personal banker noted that the current approval rate for a refinance is less than 10%. This is a far cry from just a few years ago when the approval rate was closer to 80%.
If you are thinking of refinancing your home to take advantage of low interest rates, don’t be surprised to discover that refinancing is more complicated than it used to be. The new standards certainly caught us by surprise, and were significant enough to impact the refinancing of our home. Here’s a brief run-down of the changes to expect if you are considering a refinance as well:
Lower property values. We had anticipated that our house was probably worth somewhat less than it was three years ago. What we didn’t expect was that an appraiser would assess the value of our primary residence and one of our new spec homes at 50% of the 2008 appraised value. According to our banker, appraisers are erring on the side of caution these days and appraising properties at the value a bank might recover in case of a bankruptcy. A lower property value means far less equity then you anticipated or even the possibility of being financially “upside-down” in the home.
Lower debt to income ratios. “Debt-to-income ratio” is bank speak for how much of your income should be used for mortgage payments and revolving debt, such as credit cards and credit lines. Pre-crash, it was not uncommon to swing a new home loan on a 55-60% debt-to-income; these days, our bank won’t approve anything over 40-45%.
Lower credit score. Up until the crash, our credit score was stellar. And even though we’ve never missed a payment or been late on a credit card, our credit score had dropped by 80 points. Our personal banker noted that every one of his clients had also experienced a drop in credit score due to increased credit card interest rates and lowered credit limits. If you think your credit is glowing, you might be in for a surprise.
More money in savings. During the real estate boom years, having money in savings wasn’t a condition of financing a new home. Those days are definitely over with banks now requiring a minimum of six months cash reserves before every considering a loan application. If you are one of the lucky ones with a retirement fund, these funds will be considered as “reserves.” But for those without a retirement plan, the bank will want proof of six months cash reserve in a savings account.
When it come to refinancing a home, the bottom line is that plummeting values and higher standards make it more difficult than ever to get a home loan. For homeowners caught in a trap of upside-side property values, shifting the part of the debt load to another property may be the only option available for refinancing a mortgage at a lower rate.