Don's Get Caught With Your Pants Down!

HOUSE HUNTING TIP: As soon as you're serious about buying a home, find the best mortgage broker or loan agent you can to assist you. Don't make your selection based on interest rates alone. A good track record counts for a lot.

Closing the deal should be your primary goal. If you have to pay 0.25 percent more to assure your transaction closes on time and that you're not turned down at the last minute, it's worth it.

Be candid with your loan professional about anything in your financial picture that might impact loan qualification. A good loan agent or broker will be able to assess your financial situation and anticipate what you'll need to do to satisfy the underwriter.

Be aware that appraisal issues can impact your loan approval. For example, if a previous owner added square footage without a building permit, the additional square footage probably won't be included as livable square feet.

If the appraisal comes in for less than the purchase price, the lender might not lend you enough to close the deal. Include an appraisal contingency in your contract.

As of Oct. 1, the conforming jumbo mortgage limit for expensive housing markets like New York City and San Francisco dropped from $729,750 to $625,500. In some cases, conforming jumbo lenders have moved into the market to pick up some slack. You can expect to pay about 0.25 percent more for a 30-year fixed-rate conventional jumbo loan, in some cases. However, today's lower interest rates will help boost affordability.

There are more jumbo financing options available now. Adjustable-rate mortgages that are fixed for 10 years and then revert to an adjustable have a starting rate about 0.25 percent less than a 30-year fixed jumbo. A five-year fixed starts about 0.5 percent to 0.75 percent lower, but is riskier.

THE CLOSING: Because of the risk factor, the lender may want you to have a large cash reserve. Your retirement account counts toward this.

Dian Hymer, a real estate broker with more than 30 years' experience, is a nationally syndicated real estate columnist and author of "House Hunting: The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide."

4 ways to avoid refinance rejection

My application to refinance my $200,000 loan was recently turned down ... do I have any recourse?"

If by recourse you mean a third party of some standing who will direct the lender to make the loan, or attempt to persuade them to do it, the answer is "no."

No third party is going to reunderwrite the loan to see if the lender made a mistake. Such mistakes are very rare because lenders make money only on loans they close; they lose money on loans they reject.

Reapplying with another lender

It is possible but unlikely that another lender would approve your loan. Virtually all $200,000 loans are either sold to Fannie Mae or Freddie Mac, and therefore subject to the underwriting rules of those agencies; or insured by FHA and subject to its underwriting rules.

Some lenders place "overlays" on top of these rules, which are more restrictive than those of the agencies. It is possible that your loan met agency requirements but was tripped up by a more restrictive overlay, which would mean that another lender might approve it.

Before applying elsewhere, however, I would discuss your rejection with the loan officer who gave you the bad news to see where your application fell short, and whether it might have met agency requirements.

On the assumption that you did not meet agency requirements, your only option is to change the transaction in a way that will bring it into compliance. The changes required depend on the reason or reasons you were rejected.

Credit score too low

In general, it takes considerable time to raise a credit score significantly, but there are some exceptions. One is where the score is depressed by a reporting mistake, which is not uncommon. As soon as the mistake is corrected, your score will jump. (See "How Do You Correct Mistakes In Your Credit Report?")

Another possible way to juice your credit score is to pay down high balances on your credit cards. A high ratio of balance to maximum balance, called the "utilization ratio," is considered a sign of weakness and potential trouble, reducing your score. Paying down balances to less than 50 percent of the maximums should raise your score.

Finally, you can detach yourself from the "wrong vendors." Because finance companies lend to relatively poor risks, the credit score of any borrower owing money to a finance company is lower than it would be if the creditor were a bank.

By the same logic, borrowers who have credit cards of department stores are penalized, relative to what their score would be if they had cards issued by banks. If you can't pay them off, place department-store cards at the top of your balance-reduction list.

Equity too low

The borrower's equity in his property is its appraised value less the loan balance. Equity can be increased by obtaining a higher appraisal or by paying down the balance.

You don't get a higher appraisal because you need one to refinance your mortgage; you get one because the appraiser made one or more mistakes that reduced value erroneously. You may well know the local market better than the appraiser, especially if he is located a good distance away; you will find his address on the appraisal report.

To make use of your information, however, you must start the process again with another lender. Under current rules, if your existing lender orders a new appraisal, he is obliged to use the lower of the two values.

You can also increase your equity in the house by paying down your loan balance, a process called "cash-in refinance." If you have money in the bank earning 1 to 2 percent, a cash-in refinance that allowed a rate-reduction refinance that would not otherwise be possible would earn a very high return. Of course, you must have the cash to invest.

Debt-to-income ratio too high

In general, underwriting guidelines set maximum ratios of total debt payments to borrower income of 41-43 percent. Debt payments include the mortgage payment, property taxes, homeowners insurance, mortgage insurance (if any), and all other debt payments that extend beyond the next six months and are not deferred for a year or longer.

This includes home equity credit lines (HELOCs) and other revolving credits, credit card debt that you don't pay off at month-end, auto loans, student loans and alimony and child support payments.

If your ratio is too high to qualify, there may be ways to reduce your debt payments. The cash-in refinance referred to above not only increases your equity in the house but it also reduces your monthly mortgage payment. Borrowers who don't have excess cash but do have a 401(k) retirement account can borrow against it and use the proceeds to pay down other debt. Loans from a 401(k) are not included in the debt ratio.

The bottom line is that a loan rejection is not necessarily final, but it is up to the borrower to do what is necessary to convert the transaction from one that does not meet underwriting requirements into one that does.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania

Why am I not getting the advertised interest rates?

First, remember that mortgage rates are moving constantly, and rate surveys are capturing rates from past points in time. For example, Freddie Mac’s weekly survey collects rate data over the course of a week. Bankrate.com’s survey collects rate data every Wednesday.

By the time results are released, they’re already outdated.

There are other reasons your rate might be higher. Below are five of them.

1. You’re not paying points

Average rates in Freddie Mac’s survey include average discount points paid for the mortgage. But not everyone is willing to pay points.

For the week ending Oct. 27, rates on the 30-year fixed-rate mortgage averaged 4.1%, but that rate required an average 0.8 point to get it. A point is 1% of the mortgage amount, charged as prepaid interest. Read more: Rates on 30-year mortgage slide to 4.1%.

Unless you’re going to live in your home for a very long time, paying points often doesn’t make sense, said Greg McBride, senior financial analyst for Bankrate.com.

“Where the investment pays off is if this is a loan you’re going to have for a long period of time. You’re making an investment of money now to pay the points to get the benefit of a lower monthly payment for years to come,” he said. “The more years you have of that lower monthly payment, the greater return on that initial investment of points.”

Bankrate’s weekly survey includes as many zero-point loans as possible, McBride said. That’s another reason that rates in Bankrate’s survey are different than those in Freddie Mac’s, he said. The 30-year fixed-rate mortgage averaged 4.33%, but points required to get that mortgage averaged 0.42, according to the Bankrate survey released Oct. 27.

2. Your borrower characteristics mean price adjustments

A credit score on the low side will prevent you from getting the lowest rates. Low levels of home equity will also mean a pricier mortgage rate.

That’s thanks to loan level price adjustments from Fannie Mae and Freddie Mac that have been making it tougher for borrowers to get the best rates for the past few years.

“The further down the FICO realm you go, and the higher the loan-to-value ratio, the more cost for the consumer,” said Cameron Findlay, chief economist for LendingTree.com, an online network of lenders.

Those with credit scores below 700 will have a tough time getting the rates in the low 4% range that everyone has been talking about, McBride said.

Meanwhile, a 20% equity cushion in your home for a refinance, or down payment for a purchase, is what’s needed to get the best rates these days. And if you have a jumbo mortgage, lenders usually want 25% or 30% down for the best rates, McBride said.

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However, borrowers who qualify for the newly revamped Home Affordable Refinance Program will be able to snag low rates, even if their equity has taken a severe hit. Read more: Mortgage refi plan targets hard-hit borrowers.

3. Your property type means higher rates

For condo-unit mortgages, you need a 75% loan-to-value ratio, or a 25% equity position, to get the best rates, said Christopher Randall, vice president, secondary marketing, at the Real Estate Mortgage Network, a mortgage lender.

And if your mortgage is for a vacation home or investment property, you can also expect to pay a higher rate, McBride said.

4. You don’t have recent proof of income

For the self-employed — who don’t have pay stubs as proof of recent income — the most recent tax returns are what a lender will look at before giving you a mortgage. If business has improved after your past tax return, that’s not going to be of any help as you try and get a mortgage today.

“Business could be off the charts now, but if the tax returns tell a different story, then getting approved or getting the best rates becomes a problem,” McBride said.

5. Your lender isn’t hurting for business

There can be a big disparity in what rates are offered from lender to lender, Findlay said. And it may have to do with how many mortgages they’ve been originating lately.

“Some that are lacking volume will tend to be more competitive,” he said. “Those that have enough volume may say we’re going to keep rates high.”

But the rate isn’t everything, Randall said. When shopping for mortgages, borrowers need to focus on comparing their monthly payments. “People are drawn to the interest rate… but you have to look deeper. Review the documentation,” Randall said.

For instance, it’s possible for someone to get an offer of a very low rate on a mortgage backed by the Federal Housing Administration — that loan also may come with a higher insurance premium, Randall said. That person may be better off taking a conventional mortgage with lower priced private mortgage insurance, even if their interest rate is a little higher, he said.