Hurdles in refinancing Home Loans

Taking out a home loan involves lot of research and weighing alternatives before closing of the deal. After a certain period, most of these home owners think about refinancing for better management of their finances. The catch here is that all those people possessing first mortgage or home loan are not eligible for refinancing, as is commonly believed. Qualifying for a refinance is difficult. There are many requirements.

Of these the most important is definitely your credit scores. An FICO credit score of something nearing 720 is required to avail lowest interest rates. These rates are based on scores given by the TransUnion, Equifax and Experian based on your credit reports. The credit scores can be made available to you. Late payments usually affect the credit score. Reports can be checked for accuracy. Paying off the balances quickly would aid in refinancing approvals. Credit utilization ratio which is the ratio of credit borrowed to the available credit, accounts for 30% of the credit score.

Based on the current value of your home, home equity should be worth 20%. Appraisal of the property would be done by the lenders before refinancing considerations. If the price of the home has dropped over the years, then refinancing would be difficult and might not serve any purpose.

The only alternative to refinancing in this scenario is to go for private mortgage insurance. This protects the lenders against default and the monthly installments would not leave anything to be saved. This situation of owning a house which costs less than the amount of their home loans are said to be ‘underwater’ and unfortunately such homeowners cannot refinance their first mortgages.

Home equity loans and lines of credit are risks to the lender. Thus if you possess them they have to be paid off completely before considering refinancing options. While refinancing, the first lender requires approval from the second lender and the second lender should be willing to ‘subordinate’ the first one or take second place after the first one. The credit crunch experienced by the whole world has made refinancing riskier and many lenders refuse to subordinate first mortgages.

Home owners in high cost areas are ordinarily not qualified for low interest rates in spite of excellent credit scores and high percentage of equity. The reasons for this are that huge loans or jumbo loans have always had high interest rates. Low rates are offered to loans limited to $417,000 and less. These loans pose decreased risk to the lenders since mortgage giants Fannie Mae and Freddie Mac, (government sponsored) would buy them from the secondary market. These loans are therefore called conforming loans. Some loans which are for $650.000 or more are also occasionally purchased by these mortgage firms. These expanded conforming loans are not available everywhere in the country. Some states like New York, Los Angeles, San Francisco and Washington D.C. have provisions for these loans.

It is difficult to get through to your lender these days. This is a largely due to the economic crisis that the world is facing. Patience should be the watch word in these trying days.