A long time client of mine is self employed and lives in a coop in Manhattan. She wanted to refinance her existing loan from a 6.75% interest rate down to 5%. This would have saved her over $300 a month. Isn’t that fabulous! Because business has been off the past two years and the lender requires stable or increasing income, she was just shy of what she needed to qualify for the loan and the bank denied her. Even though her loan was only 25% of the value of her home, she was lowering her monthly payment by almost $350 a month, she had over 750 FICO scores and she was not taking any cash out, the bank denied the loan. No exceptions- how can this be!

Not only are appraised values dropping and credit scores requirements higher, the banks are steadfast on expense to income ratios. A ratio is calculated on monthly expenses v. gross monthly income. FNMA (and the lenders that work with them) now requires a back-end (all housing and other expenses combined) ratio of no higher than 45% on all refinances even if the monthly payment can be much lower than before. My client’s ratio was a bit higher (48.6%) and I had to give her the bad news- embarrassed to say.

Her son volunteered to go on a co-signor of the mortgage for her. He more than qualifies to cover her entire monthly housing expense as well as his own, but he does not qualify as her co-signor. The rules go that the primary borrower must qualify for her monthly debt of at least 43% without the co-borrower. This means that if we stick to the maximum of 45%- her son would only be good for the 2% difference. So, what is the point of having a co-borrower? No reason at all- they are truly worthless. Which is a bloody-shame given how many parents and family members are more than happy to help their loved ones out. Again strike out!

There are still many opportunities to refinance an existing mortgage in order to improve the borrowers’ financial situation. There are more reasons to go through the time and expense than simply lower an interest rate. A refinance can bring on a lower monthly payment (by reducing the principle), change the terms of an existing loan to more favorable ones (adjustable to fixed rate), consolidate  overall monthly expenses (pay off high interest rate credit cards, or obtain equity out a home to pay for a much needed large expenditure (higher education).  

Since qualifying for  a loan today is much harder than three years ago, by virtue of needing a higher credit score, lower expenses and more equity, many borrowers are shocked (and amazed) that they cannot qualify for even better terms than they have. The lenders are making sure that there is a benefit to te borrower refinancing. Mostly, the benefit that they require is a monthly payment reduction. The formula that many of the banks are using: is the borrower saving enough money on the reduced monthly payment to make back the cost of refinancing the mortgage in no more than 60 months. So, it is a cost analysis, not is it better overall for the borrower analysis. Who decides? The lender. Nice work- let’s try and figure out how to do less loans at this historically low interest rate! Happy President’s Day!