Whole new ballgame for refis!
Mortgage interest rates have declined to all-time lows, resulting in a pickup in mortgage refinance applications. How many of these applications result in successful refinances remains to be seen. Lenders' qualifying criteria have tightened. The lowest interest rates are reserved for homeowners who have sufficient equity in their homes and who have high credit scores -- usually above 720. Lenders also are stricter on the borrower's overall debt-to-income ratio, but this varies from lender to lender.
Validating sufficient equity can be a show stopper, particularly in areas that lenders designate as declining markets. Should property values fall further, and the borrower suffers financial hardship, the lender could end up foreclosing. If the property doesn't sell for enough to cover the mortgage amount, the lender takes a loss.
Some appraisers are cutting back on their property valuations. For example, an Oakland, Calif., homeowner had his house appraised early in 2008 for $1.1 million. By the end of 2008 the same property was appraised again, only this time the appraiser came up with a value of $670,000. This was a very low value for a neighborhood where similar properties sell in the price range of $900,000 to $1.2 million.
HOUSE HUNTING TIP: In a situation like this, there are several ways to proceed. The first is to challenge the appraisal. The homeowner mentioned above called a local real estate agent for comparable sales information for listings sold in his neighborhood since September 2008. In this market, lenders are requiring the most recent sales data available.
A possible explanation for an appraisal that's not in sync with the local market is that the lender used an automated appraisal service. If so, sales information from outside the immediate area could have been used. For instance, in some areas, being located on one side or the other of a major thoroughfare can dramatically affect market value.
Some lenders are changing from using in-house or local appraisers to ordering appraisals through Rels Valuation, a company that provides appraisals quickly at a competitive price. However, this means that an appraiser from outside the local area could be the person who generates the appraisal.
This might be satisfactory for homes in tract developments where there is little variability from one house to the next. However, in older established neighborhoods, where there is a lot of variability in the housing stock, an out-of-area appraiser who doesn't know the idiosyncrasies of the local market could come up with an inaccurate property valuation by simply looking at the data.
Wells Fargo and other larger lenders will be requiring Rels appraisals. Wells announced on Jan. 2 that they would require a Rels appraisal for conventional purchases and cash-out refinances. Local appraisers may be slow to affiliate themselves with Rels because they will need to cut their fee considerably; they will share their fee with Rels.
Refinancers who aren't successful in challenging a low appraisal should shop around for another lender. Your real estate agent should be able to provide you with references. Mortgage brokers who have access to a private lender source, like a mortgage banker, should have fewer restrictions regarding who generates the appraisal.
Before submitting an application, make sure that you qualify creditwise and find out how much the lender will be willing to lend (the loan-to-value, or LTV, ratio). Some lenders will lend up to 90 percent of the appraised value on a conforming loan up to a loan amount.
THE CLOSING: On jumbo loans, lenders generally require a lower LTV, often 70 to 80 percent.