Once upon a time, it used to be that a person with a credit score of 640 could refinance their mortgage and pretty much be assured of getting the best rate on that mortgage. Unfortunately, those days are long gone.
The mortgage credit crisis of 2007 and 2008 resulted in nearly every mortgage loan source redefining “good” credit to mean a credit score of at least 680 and usually 700 or higher. Up until 2010, those credit scores were considered excellent but they have become the minimums just to qualify for many programs.
The one exception to these new rules is the FHA mortgage refinance program, which still defines good credit as any credit score above 640. In addition, borrowers with credit scores below 640 may still qualify for an FHA refinance mortgage loan if their loan is approved through the automated underwriting system.
The FHA loan program can help borrowers with lower credit scores, but that program does come with mortgage insurance which does add to your monthly payments.
If you have less than 20% equity in your home when you refinance, then it definitely makes sense to use the FHA program to refinance if your credit score is below 700. Private mortgage insurance costs have increased dramatically for borrowers with credit scores below 700. In many cases it is not even available (e.g. for three and four unit properties). Also, private mortgage insurance qualifying requirements are so high right now that even the most qualified borrowers are having trouble obtaining private mortgage insurance.
One option if your credit score is between 640 and 680 would be to work with a credit agency to find out why your score is low and take steps to get your credit score to a level above 680. The good news is that this process used to take months but now only takes weeks. One word of caution, however: while there are many legitimate credit repair agencies there are also a number of less-than-scrupulous companies.
For now, and the foreseeable future, 680 is the minimum credit score needed to refinance with Fannie Mae or Freddie Mac without having to get hit with a higher interest rate, and the FHA program is probably your best bet if your score is below 640 – especially if you are borrowing more than 80% of the value of your home.
More homeowners prefer to pay off their mortgages sooner as interest rates have stayed near rock-bottom and weak labor conditions have caused them to reduce their debt loads.
According to a recent survey, the current trend in refinancing into shorter-loan terms is a stark contrast to the one during the height of the housing boom, when families were taking out bigger mortgages against the rising values of their homes.
Of those homeowners who refinanced a 30-year fixed-rate mortgage during the second quarter, 37 percent moved into a 15-year or 20-year fixed-rate loan. This is the highest since the third quarter of 2003.
In the second quarter, interest on the 30-year mortgage averaged 4.65 percent, compared with a 3.84 percent average on 15-year mortgages.
Refinancing has comprised the bulk of U.S. mortgage activity since the housing bust that led to the 2007-2009 global financial crisis.
During the second quarter, the refinance share of mortgage applications, versus the share of applications for loans to buy a home, averaged 70 percent, according to Freddie Mac.
Divorced homeowners stuggling with the task of removing a former spouse’s name from the mortgage after buying out his or her equity stake in the marital house may think refinancing is the only choice.
There is another, little-known option that could possibly help you avoid refinancing and its costs, which generally run 3 to 6 percent of the outstanding loan principal. You simply ask your lender to remove the former spouse’s name, leaving the loan note in your name only.
Not all lenders or mortgage servicers offer this option, known as release of liability. The lenders and servicers that do will most likely run a separate credit check on you — requiring, for example, that you meet minimum credit scores (typically from Fannie Mae, the giant government buyer of loans), and ensuring you are current with the monthly mortgage payments. They may also require that any investors in the loan, after it is sold off, agree to the deal. If you are “under water,” and owe more on the mortgage than the home is currently worth, this process is not an option.
Most divorce settlements stipulate one of two outcomes for marital property. Either the house must be sold, or the person wanting to keep the property must buy out the other’s share, usually within months of the date of the settlement, and get the other party’s name off the mortgage — either through refinancing or a release of liability — typically within a year.
Under the second option, the former spouse signs a quit-claim deed at the divorce settlement, relinquishing his or her claim to the property. But while that action takes the former spouse off the house’s title and leaves it in one name only, it does nothing to remove his or her name from the actual mortgage.
Having the name removed protects the credit of both parties, actually. If the former spouse failed to pay other debts, a lien could be placed on the home, and if you were delinquent on the mortgage payments, your former spouse’s credit could be hurt.
Lenders or servicers typically charge $300 to $1,000 to execute a release of liability and require the property owner to pay an additional, nonrefundable application fee, typically $250 to $500. The process can take from 30 to 90 days.
Qualified borrowers not accorded the release they are asking for should consider telling their servicer or lender that unless a release of liability can be executed, the borrower will refinance the mortgage — at another lender. In such cases, the servicer might agree to do it.
Have you, or someone you know, been through this situation during or following a divorce? We’d love to hear the outcome. Were you or the other known party successful in getting the spouse removed from the mortgage? Use the comment link below to send us your comments…
If you are thinking about refinancing your home, you may want to do it quickly. Mortgage refinancing rates have been on a rise since hitting a historically low 4.17% rate on 30-year fixed rate mortgages, and they are only expected to continue go up.
So, why have so few homeowners refinanced? The sad truth is many have found they can’t refinance because of a low credit score, lowered largely because of the way debt is being weighted right now, especially credit card debt.
Two factors in particular may be keeping you from refinancing your home:
- LOWERED SPENDING LIMITS: In anticipation of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act passed last year, banks went on a credit pruning spree, cutting available credit lines on millions of borrowers. This, in turn, raised affected borrowers’ debt to credit ratios (also called “credit utilization rate”), a component of credit score calculations which can account for as much as 30 percent of a borrower’s credit score.
- INCREASED CREDIT CARD DEBT: Of course, many other would-be borrowers have increased their credit card debt through overspending, a fact largely attributable to high rates of unemployment, an unusually long average unemployment that was typical of the last few years, and retail incentives, such as low prices and increased value for the dollar when buying many products and services.
If you fit this bill, spend some time paying down your credit card debt. You may also want to consider taking out a loan to pay off your credit cards. A debt consolidation loan will look more at your payment history, your reasons for having such high credit card debt, and your ability to repay the loan. Once you receive such a loan and the credit card debt is removed, you can reapply for home refinancing with your credit score intact and likely much higher than it was previously.
Residential mortgage refinances are expected to deteriorate over the next two years due to factors not limited to rising interest rates. Some are predicting that mortgage refinancings, in fact, will fall by 77% by 2012 and drag down the overall market for originations.
Total refinances hit about $1 trillion in 2010 and accounted for 69% of the market share for originations, according to the Mortgage Bankers Association. The trade association is predicting that will drop more than two-thirds to just $352 billion and comprise of 36% market share in 2011.
MBA anticipates only $236 billion worth of refinances to take place in 2012.
Mortgage purchases will not make up for the losses in the refinance sector, according to the firm’s numbers. Purchase originations are expected to increase to $614 billion from $473 billion in 2011 (up 30%), bringing the total originations for the year to $966 billion.
In 2010, origination transactions summed $1.5 trillion, which means a nearly 36% drop in overall residential lending activity.
MBA Senior Vice President and Chief Economist Jay Brinkmann said rising mortgage rates will filter the market for refinances, and that repurchase requests from Fannie Mae, Freddie Mac and mortgage insurers will also impact the market.