Does Home Value Affect Your Ability to Refinance?
What are your chances of refinancing your mortgage? Is it going to be a struggle if you've got a starter home at the lower end of the market? Are banks more willing to work with someone who has a pricey, custom-built home?
Not necessarily. On both counts.
The price of your home or size of your mortgage really doesn't have much effect on your ability to qualify for a refinance, even in the current market. Unless you're getting up into the jumbo loan range, which has its own rules, mortgage professionals say lenders still treat all price points pretty much the same, as long as the borrower meets other qualifications in terms of equity, credit scores and the like.
Home values a major obstacle
That being said, there are some particular challenges facing homeowners at the lower end of the market these days. And even well-off homeowners can have problems if they can't convince a lender their upscale home is worth what they think it is.
"People at the lower end of the market are the ones right now that are having big problems with value," said Richard Shapiro, co-owner of Asset Mortgage Group near Boston, Mass. "If we're losing deals, it's really because of value."
Shapiro and others said the decline in home values over the past few years has hurt homeowners at the lower end of the market the worst when it comes to refinancing a mortgage. Many of them tend to be first-time homebuyers who put up only minimal down payments and have not owned the homes long enough to put a significant dent in the mortgage, so when home prices collapsed, their equity was wiped out.
Homeowners in the mid- to upper levels of the conforming loan market, on the other hand, are more apt to be repeat homebuyers who've had time to build up equity as they moved up to nicer homes. They also tend to have better credit and more financial resources than first-time homeowners, which makes it easier for them to qualify as well.
Risky loans hurt first-time buyers
Many of the lower-end borrowers also tended to be the people who took out the riskiest loans, as lenders reached far down the underwriting curve to qualify marginal borrowers for mortgages during the housing boom, according to Brian Brady, a mortgage adviser at World Wide Credit Corporation in San Diego, Calif.
"A lot of people who got in at the lower end of the market were the victims," Brady said, noting that anyone who got in at the lower end of the southern California market five years ago "got wiped out."
The easy credit also had an effect on prices and eventual price declines, Brady said, so that homes toward the lower end of the market tended to depreciate more than those in the middle ranges, which held their value better.
Brady said most of the refinances he sees these days tend to be in a "sweet spot" from $400,000-$700,000 - high enough to avoid the severe depreciations of the lower end of the market, but below the cutoff for jumbo mortgages, which present their own set of challenges.
Unique homes harder to refinance
One of the biggest challenges main challenges in refinancing a mortgage at any price point these days is being able to find comparable sales on which to base a valid assessment.
"That can be difficult for a big or small house," said Joe Ramis, of Inlanta Mortgage, a multistate lender based in Waukesha, Wis.
Having a unique home can make it difficult to obtain comparable sales on which to base an assessment. Ramis gave as an example a home valued at over $300,000 in a rural Wisconsin town, where finding comparable sales could be a real challenge.
"Most rural Wisconsin towns don't have homes that big that would attract that kind of buyer," he said.
"Common"homes easier to assess
On the other hands, homes in towns or neighborhoods with lots of other homes of comparable size and amenities nearby are relatively easy to refinance because there tend to be plenty of comparable sales for determining an accurate value.
"It's not necessarily high-end or low-end, it's what's selling around you and how common is your house?" he said.
Regardless of circumstances, Ramis said each refinance these days has to be thoroughly and fully documented, with information on credit, income, appraised value and all the other factors used to underwrite the loan. It doesn't matter if the refinance is at the low- or high end of the market.
"What's interesting is, each deal has a life of its own," he said. "You have to look at each person's status and their entire situation. There's not the slam-dunk deal and it's good anymore."
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