Q. I frequently read your column in the Friday Home Guide. Recently, you described a retired couple who were thinking of refinancing from a 10-year fixed rate to a 30-year term because interest rates are so low their financial adviser recommended that they keep a mortgage.
We, too, tried to refinance out of our 30-year 4.75 percent mortgage to a lower interest rate. Our credit union, with whom we have done business for decades, declined our loan application because of a lack of income. (I am recently retired.)
This is the same company that has our current mortgage. We also have enough money deposited with it to pay off the mortgage, and the loan amount is less than half of our home's value.
Is there some kind of federal rule about having to have a salary or income to refinance even if you have enough savings to pay off the mortgage? Incidentally, our credit scores exceed 800.
A. No, there is no federal statute that requires income in order to be eligible for a loan. Lenders, however, have overreacted to the mortgage meltdown by standardizing the underwriting process to the point of absurdity.
Receiving your email this morning gives me another opportunity to publicly vent my frustration over the lack of common sense when it comes to mortgage underwriting guidelines. Your situation is a perfect example. Let's dissect it:
- You are seeking to lower your interest rate and monthly payment.
- You are not seeking cash out.
- Your loan-to-value is less than 50 percent.
- You have excellent credit.
- You have more money deposited with the lender than the loan you are seeking to refinance.
- The lender who declined your application holds your existing loan.
Why on earth would your credit union decline your loan application? You have great credit, a 50 percent loan-to-value and enough savings deposited with it to pay off the mortgage. Your credit union declined your application because you are not showing a current income stream, but you already have many years of the required income stream in the bank. It makes no sense.
Government-owned mortgage giants Fannie Mae and Freddie Mac largely make the rules. Underwriters have been reduced to mindless clerks who are in charge of checking off a list of requirements that must be met for a loan application to go through.
An income stream is one of the requirements. No exceptions. This means an applicant who can provide a pay stub and a W-2 can get a loan even though he has no savings. But the hardworking retiree who has responsibly saved more than 10 years of the required income cannot get a loan. Go figure.
While there is plenty of blame to go around, don't forget that the Dodd-Frank folks were largely responsible for creating this mess in the first place by easing the lending rules and allowing Fannie and Freddie to enter into the subprime market. Years later, the same folks were put in charge of "fixing" the problem by instilling the inflexible cookie-cutter rules that are preventing you from being able to refinance.
Your situation is an example of why I describe today's mortgage world as a tangled ball of fishing line.
Henry Savage is president of PMC Mortgage in Alexandria. Send email to firstname.lastname@example.org.