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Want to refinance? Do your homework first

Mon Jul 9, 2012 on Blog & Florida Real Estate

An edited version of Roy Oppenheim’s commentary was originally published on Yahoo! Homes and is being redistributed on Weston Title with their permission.

Math HomeworkAs a real estate attorney for 25 years, working first on Wall Street and then on Main Street, I’ve come to the opinion that this is the best time in the past 75 years for homeowners to refinance.

Interest rates have never been lower and now I am dealing with banks, at least on the surface, that really do want to start lending money again.

Refis are a win-win situation. A homeowner wins because he gets rid of a higher interest rate and the debt that goes with it.  That person winds up with has potentially hundreds of dollars a month that can instead be put to other family debts or obligations.

Or better yet that family goes back to the malls and back to the restaurants, or maybe goes on that long put off vacation.

And then the community and the economy get the benefit of those additional dollars, which leads to increased consumer confidence, which leads to more consumer spending.  

And banks win because they keep collecting your payments, and don’t lose money in a foreclosure.

It is no wonder why over the past one hundred years every recession has been led by a refinance boom.

Up until now that is what has been missing from this tepid economic recovery, if one wants to call it that at all.  

Now of course the banks aren’t instantaneously making things easy for homeowners. The path to a refi is still a long and arduous process that a homeowner needs to be prepared for before they begin their journey.

Now of course the banks aren’t instantaneously making things easy for homeowners. The path to a refi is still a long and arduous process that a homeowner needs to be prepared for before they begin their journey.

Too often I see homeowners reach for a refinance without doing their homework. So before you walk through your local bank’s front door to seek a refi, it is key to make sure you meet certain criteria if you are planning on refinancing your home mortgage.

Savings — three times your monthly income! — in the bank

It’s key to have sufficient income to qualify. Typically banks are looking for approximately three times your gross monthly income in order to qualify for a mortgage payment. A mortgage payment will include interest, principal, insurance, and taxes as part of that calculation.

Check your credit and tax return

Review your credit report for any severe blemishes. You should always pull your credit before filling out a single application, so you know where you stand and if there are any discrepancies.

If there are, repair your credit or clear up those mistakes before going to a bank.

Gone are the days you get a loan without income verification, or what’s known as a liar loan.

Your income on your latest tax return MUST reflect the number you’ve put on your mortgage application. You will be breaking the law if your income is not substantiated by your income tax returns.

Make sure that you have all of your backup documents that the banks require in the loan application.

So what else can you do in order to position yourself as an ideal candidate for refinancing?

Keep up with your mortgage payments — and everything else

You also need to make sure that you have paid your real estate taxes, your homeowner association dues, and your homeowners insurance. If you are in arrears or in default on any of those, the bank will not hesitate to deny your application for refinancing. Do not be in default. If you are, you will absolutely not qualify for refinancing.

Explore your options

If your home is underwater — in other words, if the value of your home is less than the amount you owe on your mortgage — don’t count on the banks to refinance unless it is your primary residence.

And even then you will get push back from some banks, despite Obama’s latest alphabet soup programs, such as HARP 2.0, that claim to encourage banks to refinance underwater homeowners.

The reality is banks are encouraged but not required to participate in the programs. Banks would rather squeeze a homeowner out of an extra nickel by keeping them on a higher interest rate, as long as they can get away with it.

Shop around!

That’s sound advice in almost any major purchase, but it is especially true here.

While you can go to your original lender to refinance, in my experience, if they’ve got you in a higher interest rate they will find any and every excuse to deny your application.

For example, I’ve recently come across banks here in Florida that were denying refinancing because the condo association involved with the property did not have a sufficient security bond in place.

Have you ever heard of anything so bizarre?

That’s a new one to me, and in all my years as an attorney that is the most lame excuse I could ever imagine.

But if you do shop around you should be able to find the best interest rate possible.

Now if all that fails and you can’t refinance, there’s always the opportunity to consider a loan modification.