While mortgage rates have fallen in recent weeks, I’ve been busy locking in dozens of old clients and referrals who can receive a benefit from a refinance. I’ve been in business for almost 18 years, and my mission is to target well-qualified borrowers with excellent credit and provide them with the best available terms in the marketplace.
Since the mortgage meltdown and subsequent credit crunch, mortgage giants Fannie Mae and Freddie Mac (now owned by the federal government) have enacted a policy of “risk-based pricing.” Before the implementation of this policy, a borrower who had a marginal credit score of 650 could possibly be approved for the best available rate in the market - the same rate being offered to a borrower with a score of 800.
Risk-based pricing raises the rate incrementally as a borrower’s credit score drops. In my experience during the past couple of years, folks with scores that were not excellent but were acceptable were eligible for rates that were too high to justify a refinance. In my opinion, this policy is partly to blame for the disappointing progress of the economic and housing recovery.
Last night, I was fiddling around with hypothetical refinance scenarios on a mortgage investor’s Web sites. Indeed, it appears to me that the credit crunch is easing. Some low rates are available for folks who don’t have stellar credit.
Don’t misinterpret me. The days of “no doc” loans and 100 percent financing are gone. If you’re looking for something like that, I’m afraid you’re probably out of luck.
Here’s what I discovered:
The credit-score floor is 620. This is not considered a good score, and I was surprised at the products available.
Equity in the home is necessary. While refinances are available for folks with low scores and just 20 percent equity, the terms are far more favorable if the borrower has 30 percent or more equity. A borrower with 20 percent equity would carry a loan with an 80 percent loan-to-value (LTV) ratio because the loan would be equal to 80 percent of the property’s value.
A cash-out refinance will carry a far higher rate if the credit scores are low.
Let’s take a look at some sample rates.
A borrower with a 620 credit score and an 80 percent LTV might be offered a 30-year fixed-rate loan of about 5.25 percent with one point.
If the same borrower has an LTV of 70 percent, he or she might expect to be offered the same rate with no points. If the LTV falls to 60 percent, the borrower might be offered a rate of 5 percent with no points. That’s good money for a borrower with a credit score of just 620.
Refinances with cash out are also available for these borrowers, but the rates are higher. For an 80 percent cash-out refinance, the borrower should expect to pay a rate in the middle 5 percent range accompanied by three or four points. If the LTV remains below 70 percent, he or she shouldn’t have to pay more than one point for the same rate.
While folks with credit scores greater than 740 can enjoy refinance rates below 5 percent with no points and often no closing costs, folks with lower scores are not left out in the cold.
I refinanced a family a couple of months ago who had a credit score of 650. They had lots of equity in their home and needed cash to pay off substantial credit card debt and college tuition. Though they did not receive the most competitive rate available, I was able to lock their rate at 5.75 percent with two points at a time when rates were significantly higher than today.
While the refinance was “expensive” when compared to what a borrower with a 780 could receive, the family received the money for college, paid off all their credit cards and reduced their monthly cash outlay by almost $1,200 per month.
Keep your fingers crossed. It appears the credit crunch is easing.
Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at henrysavage@pmcmortgage.