3 tips: How you can still refinance

By Bankrate.com

Homeowners in financial trouble who want to refinance their mortgages to get better rates may be pleased to know there are still options out there for them. Strategies are available to help overcome such challenges as inadequate income, excessive debt, negative equity or poor credit.

Those challenges aren't imaginary. Lenders have tightened their standards, and there are few good solutions to common problems, according to Robert Satrick, the president of Prime Financial Services in Van Nuys, Calif., and the chairman of the California Mortgage Bankers Association in Sacramento.

"That sounds harsh. I know that," Satrick says. "But that's the reality of the way it is."

Problem: Inadequate or negative equity

The most common problem is a lack of equity, which lenders measure as a component of your loan-to-value, or LTV, ratio. If you refinanced your original mortgage to take out cash, bought your home without a down payment, obtained an interest-only or payment-option mortgage or if your property has declined significantly in value, you may be among the homeowners who are most likely to encounter this problem.

The highest LTV ratio most lenders allow today is 80%, meaning that your loan can't exceed 80% of a home's value. However, there may be some flexibility in that figure.

• MSN Real Estate: What's your home worth?

Solution: Reduce principal

One strategy for overcoming this problem is to lower your loan amount to get your LTV within the guidelines, says Jim Linnane, a senior vice president of Wells Fargo Home Mortgage in Chicago.

That can be accomplished through a lump-sum payment, a gradual reduction of principal or both. A lump sum can be applied from a savings or retirement account, sale of another asset, income tax refund or bonus, while a gradual reduction in principal can be achieved through extra payments applied to the principal, Linnane suggests.

"If you can apply $300, $400 or $500 a month toward your principal over a period of time, that's not only lowering your principal, but it's also lowering the interest that's being charged on your outstanding principal, so you are accelerating your principal reduction even faster," he says.

• Talk back: Are you hoping to refinance this year?

You'll have to forgo any income that might have been earned from that extra money, so your goal should be not just to refinance your mortgage but also to achieve a "better overall financial situation," says Peter Thompson, a senior loan officer with Professional Mortgage Partners in Downers Grove, Ill.

If your mortgage is insured by the Federal Housing Administration, or FHA, you might be able to qualify for a so-called streamlined refinance that doesn't require an appraisal. More information about this program can be found on the U.S. Department of Housing and Urban Development's Web site.

Mortgage insurance, which protects the lender from loss if you default on your loan, also may be a way to overcome insufficient equity. The catch is that you'll have to pay mortgage insurance premiums, and that could negate the benefits of the refinance. You'll need to do the math to figure out whether this trade-off makes sense for you.

If you have a second loan and the lender refuses to subordinate, you might consider combining both of your loans into one new loan. (When your first mortgage is paid off, as in a refinance, your second mortgage moves into first place, giving that lender priority on the property. The process of subordination involves asking the second lender to remain in second place.)

If you obtained your second loan through the same lender as your first and as part of your purchase-money financing, you may be in a better position to combine the two loans than if you obtained your second loan later on. In that case, you'll be subject to stricter guidelines because your refinance will be considered a cash-out, rather than a conventional rate-and-term refinance.

Either way, this two-for-one strategy "will be the best option for many people," even though "the guidelines may be a little more restrictive," Wells Fargo's Linnane says. If your second loan is an untapped line of credit, the simplest solution may be to have it closed.

Continued: Inadequate income or excessive debt

 1 | 2 | next >