Although refinancing is decided on a case-by-case basis, lenders will normally consider two overriding issues: the extent of your equity and your credit score.
1. Do You Have Suffi cient Equity (Loan-to-Value Ratio)?
Equity is the surplus of value in property aer deducting the
outstanding balances of all mortgages,
deeds of trust and/or liens that are
recorded against it. For example, if
your property has a value of $500,000
and there are two mortgages (or deeds
of trust) recorded against it with
balances totaling $400,000, you have
$100,000 of equity in your property.
Lenders will only loan money against property (regardless of whether it is in foreclosure) when there is suffi cient equity to support the amount of the loan.
But lenders will only loan on a portion of the equity in your property.
Lenders always leave an “equity
cushion” to off set potential unforeseen costs in the event your property loses value (depreciates) and they need to foreclose. The loan-to-value ratio (“LTV”) is the percentage of a property’s appraised market value on which a lender will loan. From this amount, the lender will deduct the balances of any outstanding loans and liens, if any, to determine how much they will loan.
Every lender has its own LTV standards. LTVs can range from 100%
on government-insured loans to as low as 65% for high-risk loans. Accordingly, it is advisable to ask a prospective lender about its LTV policy before submi ing a loan application.
Example 1: A lender with an 80% LTV guideline is considering making a loan on a $400,000 house. The lender calculates the amount it is willing to loan, provided there are no liens or other claims against the property:
Property value: $400,000
80% LTV: x 80%
Lender will loan: $320,000 Example 2: Let’s use the same fi gures, but this time the borrower has a fi rst
mortgage encumbering the property. Here’s is the result:
Property value: $400,000
80% LTV: x 80%
$320,000 Amount due on mortgage: -280,000 Lender will loan: $ 40,000 As you can see, the amount a lender will loan changes dramatically if there are already underlying loans encumbering your property. But remember, all lenders have their own LTV guidelines, which vary according to the type of lender, its internal policies, the type of loans it gives, and fi nancial conditions in the marketplace.
DIFFICULTY IN GETTING A GOOD DEAL UNDER FORECLOSURE CIRCUMSTANCES Depending on the time remaining in your foreclosure and your ability to find a loan, a mortgage broker may be a welcome addition to your team.
You can use the broker alone or in connection with your own efforts to track down a willing lender. Just check all loan terms carefully and don’t be pressured into accepting a bad deal.
Nevertheless, appreciate that your property is in foreclosure and that the deals offered to you may not be as favorable as you would receive under normal refinancing circumstances.
To locate a mortgage broker, look in your local yellow pages under
“mortgage brokers” or “real estate loans,” or search the internet for
“mortgage brokers” in your area.
Mortgage brokers also frequently
run advertisements in the classified
real estate section of the Sunday
newspaper. And, of course, a referral
from family, or friends is always
effective.
To figure your property’s equity, the lender will hire a licensed real estate appraiser to determine its current market value. Lenders charge the
borrower for the appraisal, which can run from $300 to $1,000 depending on the size of the property. Some lenders will add this cost to the amount of your loan, while others will require you pay the appraisal fee upfront.
2. Are You a Good Credit Risk?
Although not all lenders place as much value on credit as equity, credit is still a significant criterion. The issue of credit really breaks down into two questions:
• Do you have the fi nancial resources to repay the loan? You typically need to submit complete fi nancial statements to demonstrate that
notwithstanding the foreclosure, you will be able to make loan payments on the refinanced loan. You must include all income sources, including investments, non-job-related sources, assets and liabilities, including child support and alimony, dividends and royalties.
• What is your credit score? The lender will check out your creditworthiness by ordering your credit report from the three major credit-reporting agencies, Experian, Trans Union and Equifax (this is called a “tri-merged”
credit report). Most lenders aren’t fazed by one or two negative marks on your credit report. However, if you have a low credit score with several negative marks, you will need to explain your problems to your new lender. (For more on credit reports, credit scores, and how lenders
interpret them, read Your Credit Score,
by Liz Pulliam Weston [Pearson Prentice Hall].)
CREDIT SCORES
Credit scores range from a low of 350 to a high of 850. Here is the typical range:
FICO Credit Rating 720+ AAA Superior Credit 700-719 AA Excellent Credit 680-699 A Very Good Credit 660-679 A- Good Credit 640-659 B+ Fine Credit 620-639 B Fair Credit 600-619 C Less Than Fair Credit 580-599 C- Inferior Credit
520-579 D Bad Credit
519- F Extremely Bad Credit The average score in the United States is 629. But you need to remember that your credit score is not permanent or static. It changes almost daily. It can go up or down as you use credit and pay your bills. But you must always monitor it and appreciate that increasing your score is like climbing a mountain; the higher you go, the harder it gets.
Check out your credit if you’re planning to refi nance. You should anticipate the credit issue and obtain a copy of your credit report from each of the three major credit bureaus:
Experian: www.experian.com 888-397-3742
Trans Union: www.transunion.com 800-888-4213
Equifax: www.equifax.com 800-685-1111
All three companies will supply a free
credit report once a year, and if you
were denied credit within the past 30
days.
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