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Why will a mortgage company not refinance my loan?

Refinancing is not a good solution for everyone. You may already know this if you’ve tried to refinance, only to find that your bank is unwilling to work with you. The fact is; there are many reasons why a bank or mortgage company will not refinance your loan.

Remember that the bursting of the housing bubble resulted in hundreds of banks taking severe financial losses all across the country. Also, don’t forget that the crash caused countless numbers of homeowners to be “underwater” in their mortgages because real estate values have fallen through the basement. All of these things combine to make it much more risky for a bank to loan you money for refinancing. If your bank has already lost its shirt, it is going to be much more cautious before making new loans.

Wouldn’t a mortgage company rather refinance than foreclose?

The threat of foreclosure is one of the main things that force many people to seek refinancing. However, if you stop and think about it from the bank’s perspective, a pending foreclosure already means that the homeowner does not have the financial means to make his monthly mortgage payments. In order to solve that problem the bank must refinance at an interest rate low enough to provide monthly payments the homeowner can indeed afford. If the interest rate is unattractive for the bank, they will be resistant to making the loan.

Furthermore, when a homeowner reaches the point of foreclosure, it’s usually an indication that he has not tried to work with his bank to reach an amenable solution to his payment problems. Unbelievably, banks are usually more than willing to be very flexible with homeowners who run into financial problems, provided those homeowners contact them to explain their circumstances. Foreclosure is a measure of last resort because it usually results in the bank losing money. So if you’ve reached foreclosure, you’ve probably run out of options.

Will my credit rating affect my ability to refinance?

Another reason people choose to refinance is so they can “cash out” their equity and use the money for something else. For example, a homeowner who has $20,000 of equity built into his home might still refinance at the home’s of full value, taking that extra money and putting it in his pocket. Unfortunately, far too many homeowners who do such things use the money in a way that steals the equity from their home. They might use it to take the trip around the world, finance a child’s college education, or so on.

Although it’s not always the case, homeowners who are prone to doing such things are also more likely to have poor credit scores. You can bet that your bank will scrutinize your credit report, and every detail it contains, to look for patterns that would indicate this type of behavior. This is important to them because equity means value in case you should default to the point of foreclosure. Homeowners who cash out their equity for other things are essentially destroying the market value of the home; something the bank does not look on favorably.

Typically, you’ll need a minimum credit score of 660 or better to qualify for refinancing. Keep in mind that the lower your credit score, the higher the down payment you’ll need, and the higher the interest rate on your loan. If you think you might be heading toward refinancing anytime in the near future:

  • Make sure you keep your credit card balances at a minimum
  • You pay your credit card payments on time
  • You stay current with everyday bills like utilities and insurance payments

Should I refinance if I’m underwater?

The advice on whether to refinance a mortgage that’s underwater varies, depending on whom you ask. For those who don’t know, being underwater simply means that you owe more on your mortgage than the home is worth on the open market.

The housing crash has made being underwater a reality for countless numbers of American homeowners. People who purchased homes for hundreds of thousands of dollars prior to 2005, suddenly saw real estate values plummet by as much as 50% in some communities, meaning they owed twice as much on their mortgage than the property was worth.

Common sense would dictate that trying to refinance an underwater mortgage is probably not a good idea. In doing so, you essentially are accepting a huge loss on your financial investment. You might be far better off sticking with your current mortgage payments, even if it means taking a second job, and waiting it out until real estate values rebound. Most economists agree that will eventually happen, even though it may take a significant amount time to get there.

One last thing to consider is the fact that an underwater mortgage represents a huge risk to your bank. For that reason, many are reluctant to refinance such mortgages except under extreme conditions. When a bank does make such a loan, the interest rate will most definitely be on the high side and you will be on a short leash. You’re also going to need a significant down payment in order to make up the difference between what you owe and what your house is worth.

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