have made refinancing an attractive proposition for homeowners who
want to cut their monthly payment, extend their term or restructure
their housing debt. Yet there are hurdles that can make refinancing
difficult. Here are three of the most common refinance hurdles and
ways to overcome them.
Hurdle no. 1: Your LTV is too high
Your loan-to-value ratio, or LTV, is your loan amount expressed
as a percentage of your home's current value. For example, if you
want to borrow $80,000 and your home is worth $100,000, your LTV is
$80,000 divided by $100,000 or 80 percent.
A higher LTV won't preclude refinancing, but you'll probably
have to purchase mortgage insurance, which protects the lender's
interest if you default on your loan.
If your LTV is on the high side, one option to consider might be
the Home Affordable Refinance Program, or HARP, which "allows
certain borrowers who have loans that are owned or guaranteed by
Fannie Mae or Freddie Mac to
without regard to the loan-to-value ratio," explains Joe Parsons,
senior loan officer at PFS Funding, a mortgage company in Dublin,
One catch, according to Kirk Chivas, chief operating officer at
First Commerce Financial in Wixom, Mich., is that your loan must
have been originated on or before May 31, 2009, to refinance
Two other high-LTV options might be the
FHA Streamline Refinance
program, if your loan is insured by the Federal Housing
Administration, or a loan guaranteed by the U.S. Department of
Veterans Affairs, if you qualify for that. Given its 100 percent
financing, no mortgage insurance and flexible qualification
guidelines, Parsons describes the
as "the best loan on the planet, by far."
A completely different option would be to lower your LTV by
paying off a chunk of your mortgage. This approach is known as a
Hurdle no. 2: Your DTI is too high
Your debt-to-income ratio, or DTI, measures your capacity to pay
your debts. For example, if your monthly income is $4,000 and your
monthly minimum payments on your credit cards and other non-housing
loans total $800, your DTI is $800 divided by $4,000 or 20
Lenders' DTI guidelines can be somewhat flexible, but if you're
carrying a high debt load relative to your earnings, your DTI might
be a barrier to refinancing.
To lower your DTI, you'll need to earn more money or pay off some
of your debts. Oftentimes, however, neither of those approaches is
"Typically, there's no solution," Chivas says. "People have
gotten themselves in this position due to poor decision-making or a
job loss of one or two people working in the household."
Hurdle no. 3: Your credit score is too low
A third common hurdle to refinancing is impaired credit,
according to Joe Metzler, a mortgage specialist at Mortgages
Unlimited in St. Paul, Minn.
"A standard conventional-type loan requires a (credit score of)
660 or higher to be in the game," Metzler explains. "With an FHA
loan, 100 percent of lenders will work with you if you have a
(score of) 640 of higher. As soon as you drop to 639, you drop to
25 percent of lenders. Once you drop below 620, you drop to less
than 10 percent of lenders. Below 600, you drop to 2 percent of
Those scores and percentages are approximations, yet the
correlation is clear: the lower your score, the fewer lenders might
approve your loan.
"You're going to hear a lot of no's before you find a yes,"
Moreover, that yes will be expensive due to so-called price
adjustments that lenders apply to loans they deem more risky.
Parsons says the adjustment might be as much as 3 percent of the
loan amount, or about three-quarters of a percent on the rate, for
a score in the 620 to639 range.
To avoid a price adjustment, you'll have to boost your credit score
by using credit more responsibly.
Parsons says it's also worth the effort to try to negotiate with
your creditors or collection agencies if you have past-due balances
or delinquent accounts. Ask for what's called a deletion letter,
which says your account has been paid in full and the negative item
should be removed from your credit history.
While each of these hurdles can be a high obstacle to clear, the
right loan product and financial planning can help you achieve your
goal of refinancing your mortgage.