Why Can’t I Refinance? I Make My Payments Now…

January 25th, 2011


Rates are still very, very low by any measure, even though they have gone up some in the past few months. Although we went through a refinance boom in 2010, there are still plenty of people who want to refinance. Many of them still can, and some cannot. Why can’t they?

One of the most common things I hear when I talk to someone who wants to refinance who cannot qualify is, “I will save money by refinancing, I am paying the higher payments now, so why won’t the bank let me refinance to a lower payment?” It’s simple, a bank (many times a new and different bank) is analyzing what it sees as new risk and a new client. Why should this bank take on a new loan, even if it benefits the borrower, when they think there is repayment risk?

Even if its the same bank that has the loan now that you are talking to about a refinance, if they see an unqualified borrower, they cannot approve the loan since its does not meet Fannie Mae/Freddie Mac standards. Without meeting Fannie Mae/Freddie Mac standards they’d have an unsalable loan on their hands, that would not fit Fannie Mae/Freddie Mac guidelines. If you cannot sell a loan into the Fannie Mae/Freddie Mac secondary market, there is no point in doing the loan, because very few banks hold their own loans. Almost all loans are sold off as mortgage backed securities in the secondary market.

Some clients who want to refinance are stunned they cannot do so when:

-they do not currently have a job.
-their debt ratios are too high.
-their credit scores are sub par.
-their house does not appraise to show any equity.

While all these scenarios are a shame, and these are the people that really need to save money, the bank’s position will be, “why should we take on this new risk, and take the risk off of the hands of some other bank that currently has it.”

I had a potential client who stated, “Please understand that the house is worth $1,000,000 approximately and that I am asking to refinance a mortgage for $215,000. If this has to become an aggravation for me in terms of documents, statements, questions, etc. I’d rather stay with my current mortgage.”

He got his wish. He had been self employed for only 1 year and did not want to answer any questions at all about his assets, credit or income. And the bottom line is that Fannie Mae and Freddie Mac require a borrower to be self-employed for at least 2 years before they’ll even consider your income in qualifying for a mortgage. When he had bought his home, he was salaried, but later started his own business. When he contacted me to refinance he only had 1 year under his belt in his new company, and did not want to answer any questions nor provide documents about his income. His statement, which I have heard numerous times before, was, “I am making a higher payment now, of course I’ll make the lower payment, what does the rest matter?” Well, Fannie Mae and Freddie Mac says, “the rest matters”. And whomever holds the gold makes the rules.

Unfortunately banks and Fannie Mae and Freddie Mac have gone from closing their eyes to making loans in the boom times between 1998-2006, and now underwrite mortgage loans with incredible scrutiny. In fact, it is not going out on a limb to say they use way too much scrutiny. But I will side with the banks on this one, and agree that if someone is unqualified, and appears to be a repayment risk, why should they make the loan?


Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

2 Responses to “Why Can’t I Refinance? I Make My Payments Now…”

  1. Joe says:

    I have a Fico score of 791 an income of $79,000
    (Pension.Social Security) and an additional $125,000 IRA that I can draw on.

    My mortgage is $405,000 and my house will appraise for $650,000.My loan to vale is 62%.

    I have been told by lenders that my Debt to Income ratio is too high.

    I currently have a 5% mortgage with a payment of $2338.A refinance at 4.125 % would give me a payment of $1962.83.A reduction of $376 per month.
    Why if I can pay the $2338 can’t I qualify for a lower payment of $1962?

  2. brianm says:

    I am not sure why someone said your debt ratio is too high. The way I see it:

    income $79,000 = $6583/month
    new mortgage $1962 + $500? for taxes and insurance = $2462

    I’ll assume no other debts?

    2462/6583 = 37.3% debt ratio

    That loan should get approved, with good credit, and lots of equity. If you have other debts, then the answer may be different.

    Feel free to go to email me for details. Go to my website and click on “Connect” and then “Contact Me” and we can email directly and talk further.

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