Refinancing: Is Your Credit Good Enough?

Last Updated Jul 7, 2009 1:31 PM EDT

The window for mortgage refinancings has cracked open a bit since last fall. But because banks and mortgage companies are nervous about falling property values, they've become even more skittish and slow to process loans.

So even if you do get approved, the wait could be eight to 12 weeks. And unless you have truly gold-plated credit, don’t expect to be able to take cash out of your home when refinancing. “Be prepared for a slow, frustrating process because the systems are very backlogged,” says Lillian Gottlieb, a veteran mortgage broker in New York.

Here’s a guide to today’s market for refinancing:

Credit Availability

Medium to low

What It Takes to Get Approved

  • A modest appetite for borrowed money: You’ll improve your odds by applying for a nonjumbo loan; typically those under $417,000 (or $729,000 in some high-cost areas).
  • A high credit score: It helps if your score is above 740 (on the FICO scale of 300 to 850).
  • A low loan-to-value ratio: Lenders are paying extra attention to this figure — the amount of all loans against the house as a percentage of the home’s appraised value. The lower your loan-to-value ratio, the better the chance you’ll be approved; 80 percent is generally the maximum allowed.
  • Or recourse to one of Uncle Sam’s programs: If you don’t have a low loan-to-value ratio, you may still qualify to refinance with some help from Washington. If your loans total more than 105 percent of the value of your home (a current mortgage balance over $105,000 on a $100,000 home, for example), you’ll need to apply through the government’s Making Home Affordable refinancing program. (That program just started letting you refinance if your loans come to more than 125 percent of your home’s value).

What You’ll Pay

Refinancing rates are about a quarter of a percentage point higher than those for first mortgages, according to Jack Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania. If you want a cash-out refi, you’ll need a glistening credit score above 700 and should expect to pay as much as 1.5 points over the standard rate.

Advice

Because of lenders’ sensitivity to loan-to-value ratios, you’ll need to pay particular attention to your real estate appraisal. If the appraisal comes in below the value needed for the size of the loan you want, you’ll be rejected. To make sure your home appraises for every penny it’s worth, make sure the appraiser is aware of all the renovations you’ve done to your home. Also make sure he’s aware of any comparable sales in your area that put your home in a good light. (In other words, let him know the exorbitant price your neighbors got for their flea trap.)


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